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Overview
Growth in the district economy continued to slow in August, but the overall level of activity remained relatively high. Construction activity slowed further from this spring's robust pace. Retail sales were flat but are expected to strengthen in coming months. Manufacturing activity improved, and most district plants are now operating at high levels of capacity. In the farm economy, another large harvest is expected this fall, which should continue to keep grain prices low. Labor markets in most of the district remained very tight, with extensive reports of labor shortages. Reports of wage pressures, however, were similar to recent surveys. Retail prices were flat, while prices for construction materials and some manufacturing materials increased.
Retail Sales
Retailers in the district reported flat sales once more, despite back-to-school promotions in August. Sales of casual clothing remained strong, and women's cosmetics enjoyed a busy sales month. Purchases of home furnishings weakened somewhat following robust sales earlier in the year. Store inventories continued to expand and are expected to rise further, as managers are optimistic about future sales growth. Automobile sales varied across the district in August but remained high compared with a year ago. Expectations for future vehicle sales were similar to the previous survey but weaker than earlier in the year. Vehicle inventories did not appear to be a concern as dealers began the model year rollover.
Manufacturing
District factory activity showed some progress in August following weakness earlier in the year, with capacity utilization at its highest level in over a year. Most manufacturing materials remained generally available, improving overall lead times. Concerns about future material availability eased slightly from the previous survey, with managers now expecting few problems. Most managers were dissatisfied with current inventories and plan to trim stock levels in coming months.
Housing
Builders in the district continued to report a slowing in construction activity, with housing starts steadily declining since the spring. However, home starts in August remained above year-ago levels. Expectations for future building activity improved after dropping sharply in the previous survey. Extensive availability problems continued for sheetrock and some other construction materials, but some builders expect these problems to ease in coming months as supply increases and demand growth slows down. Home sales remained flat in August, and inventories of unsold homes were largely unchanged. Mortgage demand has slowed along with the fall in housing starts and rising interest rates, and mortgage lenders expect demand to continue to decline.
Banking
Bankers report that loans increased and deposits held steady in August, boosting loan-deposit ratios. Demand rose for consumer loans, commercial real estate loans, and agricultural loans. Demand for home mortgage loans fell. On the deposit side, declines in NOW accounts and small time deposits were offset by an increase in large time deposits. Almost all respondent banks increased their prime lending rate last month, and about half raised their consumer lending rates. Most banks expect to raise their prime rate and consumer lending rates in the near future. A few banks tightened their lending standards on agricultural loans in response to low commodity prices.
Energy
After pausing in July, district energy activity in August continued the rebound that began in April. The rig count rose 9 percent in August and is now more than 26 percent above the March low. This trend is expected to continue, so long as oil prices remain around current levels. The price of West Texas intermediate crude oil rose above $21 per barrel in August after reaching a low of $11 at the beginning of the year. Expectations of OPEC holding to production quotas until spring could keep prices high and rig activity rising in coming months. Natural gas prices jumped 24 percent in August as supplies struggled to keep up with strong demand.
Agriculture
The district's corn and soybean crops are in good condition with above-average yields expected. Another bumper harvest promises to boost already large supplies and keep prices low this fall. Low feed costs and stronger cattle prices have boosted profits for the district cattle industry. With profits up, district feedlots are filling up and cattle ranchers are expected to begin rebuilding breeding herds. District bankers report farm loan portfolios have weakened somewhat during the past year, and with farm commodity prices down, further deterioration is expected. The farm downturn has also slowed rural business activity, especially motor vehicle and farm equipment sales.
Wages and Prices
Labor markets remained very tight in most of the district, with across-the-board reports of labor shortages. Manufacturing firms continued to face shortages of production workers and also reported challenges in recruiting professional staff, such as engineers and accountants. Retailers experienced increased difficulties finding sufficient sales workers for back-to-school promotions. All types of construction workers remained extremely hard to find. Overall wage pressures were similar to the previous two surveys, as a reported rise in wage pressures by retailers and builders was offset by a slight easing in manufacturing. Retail prices were flat in August and are likely to remain so in the near future. Prices for some manufacturing materials edged up and are expected to continue rising in coming months. Prices for construction materials rose again, especially for sheetrock. Further increases are anticipated.
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Minneapolis