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The Tenth District economy slowed in December. Manufacturing activity fell, residential building declined further, and sizable layoffs were announced at several district firms. Auto sales also dropped sharply, and overall retail sales were sluggish during the holiday season, despite heavy discounting. On the positive side, commercial construction activity remained solid, and energy activity continued to rise. In the farm economy, poor pasture conditions have limited expansion of cattle breeding herds. District labor markets remained tight, but wage pressures appeared to ease somewhat, especially in the retail sector. Prices were flat, except for declines in some manufacturing materials.
Retail Sales
Retail sales in December were only slightly higher than a year ago in most locations. Sales of home electronics were solid and winter clothing sold well with the onset of unusually cold weather, but sales of other items were generally weak despite heavy discounting. In contrast to bricks-and-mortar retailers, several Internet retail firms based in the district reported that growth in online purchases matched or exceeded expectations. Looking ahead, store managers expect sales to pick up again by Easter. Motor vehicle sales continued to slow and were much weaker than a year ago. Dealers reported difficulties moving all makes and models, despite significant manufacturer incentives. Inventories of unsold cars were up throughout the district, and many dealers have delayed purchasing new vehicles. Expectations for sales in coming months remain subdued.
Manufacturing
District factory activity fell in December, with fewer firms reporting high levels of capacity utilization than in the recent past. Weaker demand, higher input costs, and the strong dollar all contributed to the slowdown. The most prominent increase in input costs was for natural gas, as some fertilizer and chemical plants reported they were drastically reducing production to sell their natural gas supplies on the open market. No material availability problems were reported, and lead times were virtually unchanged. Managers do not anticipate material availability problems in coming months. Firms continued to trim inventories and many plan to trim further through the spring.
Real Estate and Construction
Residential construction activity continued to slow in December, while commercial building remained solid. Housing starts fell in most of the district and were well below year-ago levels in some areas. Builders expect a flattening out of residential building activity over the next three months. Sales of new and existing homes remained solid in western parts of the district, but were slow elsewhere. Mortgage demand was mixed relative to the previous month, but still down considerably from a year ago. Lenders expect refinancing activity to increase in coming months in response to the recent easing in mortgage rates. Commercial construction activity held steady, and vacancy and absorption rates remained largely unchanged. There was, however, some concern about overbuilding in the retail sector.
Banking
Bankers reported that loans edged down and deposits increased in December, reducing loan-deposit ratios somewhat. Demand eased for all major loan categories except home equity loans and agricultural loans, both of which were flat. On the deposit side, demand deposits, NOW accounts, money market deposit accounts, and small time and savings accounts were all up, while large CDs were unchanged. Most banks attributed the deposit increases to seasonal factors. All respondent banks left their prime lending rates unchanged in December, and almost all banks held their consumer lending rates steady. Lending standards were generally unchanged.
Energy
District energy activity continued to rise as rapidly as drillers could find workers and rigs. The count of active oil and gas rigs in the district rose 10 percent in December to reach an eight-year high. District sources reported that the national rig fleet is now fully employed. Further expansion will require the manufacture of additional equipment. Natural gas prices doubled to more than $10 per mcf in December, but producers said this price increase would have little effect on their investment decisions because prices were already high enough to justify expansion.
Agriculture
The district's winter wheat crop was hurt by dry weather in the fall months. While fewer wheat fields are suitable for grazing as a result of the damage, other forages are in ample supply for winter. Nonetheless, the poor pasture conditions have made district cattle ranchers reluctant to expand their breeding herds. District bankers indicate big government payments and strong livestock profits have limited serious problems in farm loan portfolios, but they expect low crop prices to hold down incomes for crop producers. District farmland prices edged up as a result of some farmers expanding their operations and nonfarm investors purchasing land for recreation uses.
Wages and Prices
District labor markets remained tight in December. However, contacts reported that recently announced layoffs at district retail establishments, communications firms, automobile plants, and Internet startups could help alleviate labor pressures in some areas. The greatest labor shortages were for skilled positions in information technology, manufacturing production, health care, and oil and gas drilling. Specific jobs experiencing acute shortages included masons, framers, welders, machinists, nurses, and pharmacists. The proportion of business contacts reporting increased wage pressures was down from the previous survey, particularly in the retail sector. However, wages rose considerably for oil and gas field workers. Retail prices were down in December, due to early discounting in the holiday shopping period. Store managers expect prices to remain steady through Easter. Prices fell for several manufacturing inputs, including steel and plastics, but are expected to stabilize in coming months. Building material prices were largely unchanged.
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Minneapolis