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The district economy grew moderately again last month, although widespread signs of easing remain. Holiday retail sales were very brisk and somewhat higher than expected. Construction activity also remained strong. But manufacturing activity in the district declined again and the energy sector weakened from an already depressed position due to another fall in energy prices. In the farm economy, recent government payments to grain producers generated some recovery in overall farm income, but district hog producers continued to have difficulties due to record-low prices. Labor markets remained very tight in most of the district, but wage pressures subsided somewhat from recent surveys, especially in the retail sector. Prices remained flat at the retail level and mixed for construction materials, while prices for steel and other manufacturing materials continued to decline.
Retail Sales
Retailers reported robust holiday sales in the Tenth District, stronger than a year ago, as consumers remained very optimistic about the state of the economy. Sales were especially strong in several large metropolitan areas, and at discount stores more than at major department stores. Sportswear and electronics sold particularly well in the Christmas season, and post-holiday sales were strong due to increased sales of coats and other winter items once cold weather arrived with a vengeance. Retail sales in coming months are expected to decline seasonally, although not as much as in past years. After months of expansion in preparation for the holiday season, stores began trimming inventories in late December, but most managers want to start increasing stock levels again within the next quarter. Automobile sales cooled slightly from a strong November, although purchases of light trucks remained steady. The slowdown pushed vehicle sales modestly below year-ago levels. Despite continued tightness in credit conditions, dealers are slightly more optimistic about the near future than they have been in the recent past.
Manufacturing
Tenth District manufacturing activity continued to slow last month, as slack foreign demand and general manufacturing weakness at the national level continued to take its toll. Slower activity resulted in plants operating at medium levels of capacity, with a few respondents even reporting low levels of capacity utilization, in clear contrast with high levels of capacity utilization six months ago. Manufacturing materials remained generally available, and lead times continued to decline. No major changes are expected on material availability in the near future. Managers have been trimming inventories slightly and were a bit more satisfied with stock levels than in the recent past, although many plan to keep trimming over the next few months.
Housing
Construction activity was robust again last month, as healthy growth in housing starts pushed activity well above year-ago levels. In addition, sales of new homes were stronger than they had been in several months, helped by the unusually warm weather. However, a seasonal slowdown in new home purchases is expected in coming months as colder weather keeps potential buyers away. Inventories of unsold homes were practically unchanged from the previous survey as faster construction activity was offset by stronger sales. Mortgage lenders reported that refinancing activity last month remained as strong as in the past few months, with total mortgage demand well above year-ago levels. Similar to developers, lenders expect somewhat weaker demand in the near future due to seasonal factors.
Banking
Bankers report that loans were stable while deposits increased last month, reducing loan-deposit ratios. Home mortgage loans increased sharply, offsetting declines in consumer loans and commercial real estate loans. On the deposit side, increases in demand deposits, NOW accounts, and money market deposit accounts outweighed a decrease in small time and savings deposits. All respondent banks left their prime lending rates unchanged last month, and most expect to hold rates steady in the near term. Almost half the banks reduced their consumer lending rates, but most expect to leave rates unchanged in the near future. Lending standards were unchanged.
Energy
District energy activity continued to slide in December as prices declined further. The rig count was unchanged from November's record low but was 34 percent below year-ago levels. The sharp declines in energy prices are likely to further slow future activity. The price of West Texas Intermediate crude oil fell 15 percent in December, to almost 40 percent below year-ago levels. When adjusted for inflation, oil is now the cheapest it has been since the Great Depression. Natural gas prices
tumbled 16 percent in December, due in part to milder than normal weather throughout most of the month. However, the recent cold snap across the country is expected to push gas prices higher.
Agriculture
The district's winter wheat crop is in good condition, with adequate snow cover to protect it from the winter weather. Less wheat pasture is available than last year due to some late planting, but the existing wheat pasture is in good shape. Hog producers in the district are still facing large losses due to low market prices. Many small producers have already liquidated their herds, but remaining producers are expected to hold out for higher prices. Despite low farm prices, district farmland values and cash rents are stable. District bankers indicate that preliminary credit reviews of agricultural borrowers look fairly good. In most cases, bankers report that fewer than 5 percent of the banks' agricultural loans will not be renewed, about the same percentage as a year ago. The recent government payments helped out producers' balance sheets and likely prevented a much weaker farm income situation in the district. However, there is concern about repayment difficulties should producers have another bad year.
Wages and Prices
Labor markets remained very tight in most of the district, but wage pressures subsided somewhat from recent surveys. Information technology and construction workers continue to be the most difficult to find. Retailers again complained of a lack of entry-level and general sales workers. Despite slower activity levels, manufacturers continued to have problems finding both skilled and unskilled production workers, with welders and machinists in the highest demand. Laborers of all levels of skill and experience are still in great need for builders as well. Wage pressures, where they exist, appear greatest in the manufacturing and construction sectors. At retail establishments, many managers reported that most wage increases were given in the middle of 1998, so fewer raises to retain or attract workers were given lately. Retail prices remained flat last month and are expected to remain stable in the near future. Prices for most manufacturing materials continued to drop, especially for steel and its byproducts. In addition, more managers than in previous surveys expect prices for materials to decline further in the near future. Prices of a few construction materials, such as concrete and sheetrock, were up slightly last month, while the price of lumber edged down.
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Minneapolis