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The Tenth District economy grew moderately in late April and May. Manufacturing
activity expanded strongly, consumer spending increased, and labor markets continued
to firm. Commercial real estate activity edged up, and energy activity rose
further. On the negative side, residential construction declined modestly, and
drought conditions continued to be a problem in the agricultural sector. Wage
pressures increased somewhat, while wholesale and retail price pressures were
little changed.
Consumer Spending
Consumer spending expanded moderately in late April and May. Most retail contacts
reported that sales were higher than in the prior survey period and above year-ago
levels. However, some store managers indicated that inventory levels were too
high, and they expect to trim inventories going forward. As in the previous
survey, retail contacts were generally optimistic about sales in the next several
months. Auto dealers reported that sales in late April and May were mostly unchanged
from the previous survey period and remained lower than a year ago. Sales of
large SUVs and pickup trucks were characterized as weak by many dealers. Inventory
levels were said to be satisfactory at most dealerships, and contacts generally
expect sales to increase somewhat in the coming months. Travel and tourism contacts
reported activity was mostly unchanged since the previous survey. Passenger
counts at District airports were generally flat but remained appreciably higher
than a year ago. Most hotel contacts said that occupancy rates were similar
to those seen this time last year. For the most part, travel and tourism contacts
expect solid activity during the summer season.
Manufacturing
Manufacturing activity in the District expanded strongly in late April and May.
Production, shipments and new orders increased across the District, and many
contacts also reported solid growth in capital spending. Growth in manufacturing
activity is expected to remain strong in coming months, but growth in capital
spending is expected to slow somewhat. Several contacts noted continued difficulty
acquiring steel, but no other materials were reported to be abnormally difficult
to obtain.
Real Estate and Construction
Residential construction declined slightly in late April and May, while commercial
real estate activity edged up. Home builders reported that starts decreased
somewhat since the previous survey, and contacts in most parts of the District
expect further declines in the months ahead. Construction materials were generally
reported to be available, and no significant problems obtaining materials are
anticipated in the coming months. Residential real estate agents in most areas
said that home sales decreased slightly since the previous survey, with the
high-end market showing the most weakness. Inventories of unsold homes continued
to rise in many markets and for the most part were well above year-ago levels.
Most contacts expect home sales to hold steady or fall further in the coming
months. Home price appreciation remained modest in most areas, and real estate
agents expect little growth in home prices going forward. Mortgage lenders reported
that demand for home purchase loans was unchanged since the previous survey,
while demand for refinancings declined. Some lenders are optimistic about growth
in home purchase loans heading forward, but virtually all contacts expect refinancings
to continue to decline. Commercial real estate activity improved slightly in
late April and May. Vacancy rates declined and rents for commercial space rose
slightly from the previous survey period in most markets. Commercial real estate
agents expect conditions to continue to improve slightly in the months ahead.
Commercial construction remained strong, although there were a few reports that
high materials costs were resulting in the scaling down or postponement of some
projects.
Banking
Bankers reported that both deposits and loans held steady since the last survey,
leaving loan-deposit ratios unchanged. Demand rose slightly for commercial real
estate loans and construction loans, while demand for home equity loans fell
somewhat. On the deposit side, all types of accounts were stable. Nearly all
respondents raised their prime lending rates and consumer lending rates since
the last survey. Lending standards were unchanged.
Energy
Energy activity continued to expand in the District during late April and May.
The count of active oil and gas drilling rigs in the region increased slightly
since the prior survey period and remained well above year-ago levels. Many
contacts continued to report that shortages of equipment and labor were constraining
drilling activity. Drilling is expected to expand further in the months ahead.
Mining activity also remains strong in the District, and a recently announced
railway expansion is expected to ease delays in the transport of coal from Wyoming's
Powder River Basin.
Agriculture
Agricultural conditions in the District deteriorated in late April and May as
drought conditions intensified. In some areas, winter wheat production is expected
to be roughly 50 percent below last year's level. Because of the expected poor
crop, wheat prices are the highest they have been in several years. Cattle producers
have also been adversely affected by the extended drought, as deteriorating
pasture conditions continued to force early placements of cattle into feedlots.
Respondents expressed concerns about high fuel and fertilizer costs, as well
as the increasing cost of rail transportation.
Labor Markets and Wages
Labor markets continued to firm in late April and May, and wage pressures increased
somewhat. Hiring announcements once again outpaced layoff announcements by a
sizeable margin. Many of the new jobs announced were in the manufacturing sector.
In addition, the job market outlook for recent college graduates across the
District was reported to be very favorable. The percentage of contacts reporting
labor shortages was similar to the previous survey, but the fraction of firms
reporting above-normal wage increases rose somewhat. Among the workers reported
to be in short supply were engineers, auto technicians, nurses, oil and gas
workers, and skilled manufacturing workers.
Prices
Wholesale and retail price pressures generally held steady in late April and
May. A slightly higher percentage of manufacturers than in the previous survey
reported higher prices for raw materials, including steel and petroleum-based
inputs. However, the share of firms reporting higher finished goods prices was
little changed and substantially below the share reporting higher materials
prices. Also, expectations for future increases in raw materials and finished
good prices were about the same as in the previous survey period. Home builders
indicated that materials costs were mostly stable, but some builders expect
price increases in the months ahead. Both the share of retailers reporting higher
prices than a year ago and the share planning price increases in the next several
months held steady.
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Minneapolis