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The Tenth District economy showed some signs of weakening in March and early
April, due in part to the onset of war. Retail sales as a whole edged down,
and manufacturing activity softened. In addition, commercial real estate remained
in a slump. On the positive side, residential real estate activity maintained
its strong pace, and energy activity continued to expand. In the farm economy,
recent rain and snow eased drought conditions in some areas. Wage and price
pressures remained largely subdued across the District, although prices for
some manufacturing materials continued to rise.
Consumer Spending
Retail sales in the District fell slightly in March and early April after improving
earlier in the year and were lower than a year ago at most stores. Many retailers
said sales in early March were soft and that both traffic and sales slowed further
after the onset of war in Iraq. Some stores in the District's Rocky Mountain
states, however, reported a rebound in sales in recent weeks as local weather
conditions improved after heavy snows in mid-March. Among product categories,
apparel sales appeared to be weakest. Most managers were hopeful that consumer
confidence would improve with the conclusion of the war, resulting in stronger
sales. However, stores were keeping inventories lean, and many managers expect
to trim stock levels in coming months. Motor vehicle sales were weak in March
but began to pick up slightly in early April after the expansion of some manufacturer
incentives. As in previous surveys, demand for SUVs remained solid, but sales
of most other types of vehicles were sluggish. Most dealers expect further gradual
improvement in sales by early summer and plan to increase inventories accordingly.
In the tourism industry, the Rocky Mountain ski resorts posted strong attendance
figures in late March and early April, as fresh snowfall appeared to offset
travelers' hesitancy caused by the start of war.
Manufacturing
District manufacturing activity weakened somewhat in March and early April.
Although some contacts attributed the softening to the onset of war, the majority
of firms reported that the war was having no effect on their business. Production
and shipments fell slightly below year-ago levels after rising in recent months,
and many factories continued to shed employees. Indeed, nearly all of the large
layoff announcements in recent weeks have been from manufacturers. Inventories
of finished goods rose moderately as some customers delayed their purchases.
Despite the recent slowing, manufacturers maintained their optimism about future
production and were increasing inventories of raw materials. Expectations for
future hiring also remained positive. On the other hand, expectations for future
capital spending eased somewhat after improving in February.
Real Estate and Construction
Residential real estate activity in the District continued to show strength
in March and early April, although commercial real estate activity remained
weak. Single-family housing starts increased further in most District cities,
with builders reporting little effect from the onset of war. Much of the increase
continued to be for lower-priced homes, although several contacts mentioned
some pickup in higher-end homebuilding as well. Builders generally expect typical
seasonal increases in home construction through early summer. Home sales across
the District remained relatively steady in March and early April, although inventories
of unsold homes were higher than a year ago in most cities. Many realtors reported
good buyer traffic in recent weeks and expect solid sales to persist into the
summer months. Mortgage demand continued to be quite strong throughout the District,
and lenders generally expect demand for both new home loans and refinancings
to hold steady. In contrast to the residential market, commercial real estate
activity remained weak across the District in March and early April, with some
cities experiencing further difficulties. Office vacancy rates edged up in Denver
and Kansas City, and prices of office space in those cities fell slightly. Absorption
rates were fairly constant across the District, however, and commercial realtors
generally do not expect further deterioration of office markets in coming months.
Banking
Bankers report that loans declined and deposits rose since the last survey,
reducing loan-deposit ratios. Demand increased for home mortgage loans and home
equity loans but fell for other categories, especially commercial and industrial
loans. On the deposit side, all types of accounts rose except large CDs, which
held steady. Some respondents attributed the increase in liquid accounts to
a flight to safety. All respondents left their prime lending rates unchanged
since the last survey, but half of them reduced their consumer lending rates
slightly. Lending standards were generally unchanged.
Energy
District energy activity continued to expand in March and early April. By mid-April,
the count of active oil and gas drilling rigs in the region had risen almost
10 percent from early March and nearly 40 percent from the beginning of the
year. Although energy prices have declined from recent peaks, they remain relatively
high in comparison to previous years. Natural gas prices are expected to stay
above average through the summer as companies replenish unusually low inventories.
In addition, significant new gas pipeline capacity from the Rocky Mountains
is scheduled to open in coming weeks. As a result of these factors, drilling
activity is expected to remain solid in 2003.
Agriculture
In the District's farm economy, recent rain and snow have eased drought conditions
in some areas. The precipitation has helped pastures, but the damage sustained
from the drought will take time to overcome. Spring planting conditions have
also benefited from the moisture. Recent credit reviews suggest that farm borrowers
were still experiencing some deterioration in their finances in drought-stricken
areas. Most District bankers remain cautious, and some have tightened their
farm lending standards. If moisture conditions continue to improve, farm balance
sheets are expected to strengthen this year.
Wages and Prices
Wage and price pressures remained generally muted across the District, although
high energy prices continued to squeeze some manufacturers' profit margins.
Labor markets were still very slack in March and early April, and managers reported
few problems finding workers. However, the pace of layoff announcements continued
to ease after rising last fall. Wage pressures were virtually nonexistent, and
some employers have sought to control costs by eliminating matching funds for
retirement plans. Retail prices continued to ease due to promotional discounting,
and retailers expect prices to be flat to slightly lower in coming months. Manufacturers
continued to report rising prices for some petroleum-based products, but the
easing in gasoline prices in recent weeks has led to reductions in suppliers'
transportation surcharges. Several manufacturers also reported that finished
goods prices have declined since the previous survey after showing signs of
firming earlier in the year. As in previous surveys, prices for construction
materials were largely unchanged and are expected to remain flat through early
summer.
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Minneapolis