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The Tenth District economy slowed somewhat in September and early October, but business contacts remained cautiously optimistic about future activity. Consumer spending fell slightly, manufacturing activity eased, and energy activity edged down. Commercial real estate markets showed no improvement, and the farm economy continued to suffer from drought conditions. On the positive side, housing activity remained solid in much of the District. Labor markets remained soft, with wage pressures subdued. Retail prices were flat, while prices for some manufacturing materials continued to edge up.
Consumer Spending
Retailers in the District reported slightly weaker sales in September and early October than in previous months. Sales on a year-over-year basis were also down marginally. Unseasonably warm weather depressed sales of fall and winter apparel, in particular. Some merchandise categories, however, including home furnishings and electronics, remained relatively strong. Store managers were generally satisfied with inventory positions and plan to build stock levels as usual in preparation for the holiday season. Although some managers expressed concern about continued economic uncertainty, most anticipate solid sales in coming months. Following a strong August, motor vehicle sales declined sharply in September and early October. Outside of Colorado, however, vehicle sales in the District were still slightly higher than a year ago. Auto dealers generally expressed more uncertainty about future sales than other types of retailers, and some were ordering fewer new models than in past years. In the tourism industry, leisure travel activity was solid in most of the District and was particularly strong at the national parks in Wyoming.
Manufacturing
District factory activity eased slightly in September and early October. After rising during much of the year, production and new orders edged down, pushing capacity utilization rates lower. In addition, both actual and planned capital spending fell considerably after improving somewhat during the summer months, with most plant managers citing weak demand for their products as the reason for reducing expenditures. Despite these signs of weakness, plant managers continued to express optimism about future production levels. Aside from some delays caused by the dock workers' strike, managers reported few difficulties obtaining materials other than steel.
Real Estate and Construction
Residential real estate activity in September and early October was solid in most of the District, while commercial real estate markets remained weak. Building activity was steady in most areas, although single-family construction slowed somewhat in Denver, Colorado Springs, and Tulsa. Most builders expect similar levels of home construction in coming months. Home sales also remained solid except in Tulsa and much of Colorado. Home prices were flat or rose only slightly throughout the District. Realtors anticipate some improvement in home sales in the few areas where sales have been weak, and they expect steady sales elsewhere. Mortgage lenders reported another sizable increase in demand for home loans, primarily for refinancings. In contrast to the previous survey, lenders reported that more of the recent refinancing activity was for the purpose of reducing monthly payments than for taking cash out. Mortgage demand is generally expected to level off in coming months. Commercial real estate activity weakened further in Denver and showed no improvement in other District cities. Office vacancy rates remained higher than a year ago throughout the District, and most realtors reported their market was overbuilt. Commercial realtors in some markets expect further deterioration in coming months, as more tenants vacate space.
Banking
Bankers reported that loans fell and deposits edged up since the last survey, reducing loan-deposit ratios. Demand increased for home mortgage loans but fell for commercial and industrial loans, residential construction loans, and commercial real estate loans. Demand for home equity loans was little changed overall, with some bankers reporting increased demand due to low interest rates and others reporting decreased demand due to cash-out refinancings. On the deposit side, all categories edged up except large CDs, which held steady. All respondent banks left their prime lending rates unchanged, and most banks also held their consumer lending rates steady. A few banks tightened their lending standards, citing weak economic conditions.
Energy
Energy activity in the District fell slightly in September and early October, but is expected to rebound this winter. The count of active oil and gas drilling rigs in the region declined somewhat from levels reached during the summer. However, energy prices have risen recently and District contacts expect natural gas prices to hold these gains, leading to increased drilling activity in coming months.
Agriculture
The District's farm economy continued to suffer from drought conditions in September and early October. Non-irrigated corn and soybean crops suffered significant damage, and producers will have to rely heavily on crop insurance payments. However, irrigated crops were average, and producers should benefit from high commodity prices. The drought also eroded pasture conditions, forcing some District ranchers to sell cattle early or reduce their breeding herds. District feedlots face losses due to low prices and limited feed supplies. Despite the difficulties in agriculture brought on by the drought, District farmland values have held firm.
Wages and Prices
Wage and price pressures remained subdued across the District in September and early October. Labor markets were quite slack, with employers still having few difficulties filling all but the least desirable positions. Layoff announcements in the District began to pick up in October after subsiding in August and September, suggesting that softness in labor markets will continue. Wage pressures remained virtually nonexistent across the District, but many employers continued to express concerns about rising health care premiums. Retail prices were flat in September and early October and are expected to remain stable through the rest of the year. Manufacturers reported that finished goods prices edged down, while prices for some materials, particularly steel, continued to rise. Plant managers expect finished goods prices to continue to fall slightly, and they anticipate further modest increases in materials prices. Builders reported steady prices for materials, and do not foresee any changes in the near future.
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Minneapolis