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The Tenth District economy strengthened further in December, and contacts were generally optimistic about future activity. Holiday retail sales were quite solid, labor markets firmed slightly, and manufacturing continued to expand. Winter tourism activity got off to a strong start, and the housing and energy markets remained strong. On the negative side, commercial real estate markets remained weak. The district farm economy remained strong, but contacts were somewhat uncertain about future conditions due to the appearance of mad cow disease. Wage and price increases generally remained modest, although some materials prices continued to rise rapidly.
Consumer Spending
Retailers were generally pleased with holiday retail sales. Most stores reported December sales were well ahead of a year ago, and many managers said it was their best Christmas season since 2000. A few discount stores, however, reported year-over-year gains were slightly less than they expected. Among product categories, sales of electronics were particularly strong, although managers generally reported solid sales of nearly all types of items. An exception was winter apparel, which suffered from unseasonably warm weather in most areas of the district. Store managers were generally satisfied with inventory levels following the holidays and plan few adjustments heading forward. Most managers were optimistic that solid year-over-year sales growth would continue in coming months. Sales of motor vehicles generally held steady in December but were still below year-ago levels in some areas of the district. Looking ahead, most auto dealers expect sales to be stronger by the end of winter. Tourism activity in the district was strong over the holidays. Airport traffic continued to increase in most cities, and most Rocky Mountain ski areas reported an increase over last year's near-record holiday season.
Manufacturing
District manufacturing activity continued to expand in December, and expectations for future output remained high. Compared to the previous survey, most plants reported slightly higher levels of capacity utilization and modest increases in employees and hours. Consistent with the recent increases in activity, supplier delivery times lengthened slightly, and several manufacturers reported difficulties obtaining materials, particularly steel. Expectations for future production remained very high, as the volume of new orders continued to rise and a sizable backlog of orders emerged. More firms than in previous surveys also plan to increase capital spending in the months ahead, primarily to replace outdated equipment but also in some cases to expand capacity. On a negative note, some meat-packing plants in the district have laid off workers or warned of future cutbacks due to the impact of mad cow disease on their export business.
Real Estate and Construction
Residential real estate activity in the district remained quite solid in December, while commercial real estate activity was still weak. Single-family housing starts continued at a strong pace in most district cities. Construction of entry-level homes provided most of the strength but, for the second survey in a row, some builders also reported signs of a turnaround in high-end single-family construction. Most builders expect home construction to be steady through the rest of the winter. Builders reported few difficulties obtaining construction materials, in part because of weakness in commercial and multifamily building activity. Heading forward, a few builders were concerned about the availability of lumber, but they generally did not anticipate sizable problems in obtaining materials. Although still quite high by historical standards, home sales continued to ease from summer peaks in most district cities, and realtors generally expect sales to be flat through the winter. In an exception to the trend, home sales in Denver have finally begun to pick up, and Denver realtors expect activity to continue to rebound in coming months. Mortgage lenders reported further declines in mortgage demand, due largely to continued easing in refinancing activity but also to slower home sales. Most lenders believed refinancing activity had neared a bottom, and they expect total mortgage demand to be flat to slightly higher in the months ahead. Commercial real estate activity in the district remained weak in December, as office vacancy rates showed little or no improvement. Realtors generally expect little change in commercial real estate markets in the months ahead.
Banking
Bankers report that loans edged up and deposits remained unchanged since the last survey, boosting loan-deposit ratios slightly. Demand increased for consumer loans and home equity loans, making up for a decline in the demand for home mortgage loans. Demand for other loan categories remained unchanged. On the deposit side, liquid accounts, small time deposits, and large CDs all held steady. All respondent banks left their prime lending rates and consumer lending rates unchanged. No changes in lending standards were reported.
Energy
District energy activity remained strong in December, as energy prices rose further. The count of active oil and gas drilling rigs in the region was unchanged from the previous survey but still nearly 50 percent higher than a year ago. District energy contacts expect natural gas production to remain high in coming months but for oil production to decline slightly. Most district energy firms plan modest increases in capital spending in 2004, with an emphasis on natural gas.
Agriculture
The district farm economy remained strong in December, although the appearance of mad cow disease and continued drought in some areas caused concern about future conditions. Farm incomes continued to benefit from the high soybean and cattle prices that emerged in the fall. Despite higher incomes, however, farmers remained reluctant to expand their operations and make large investments. While soybean prices are generally expected to remain strong, uncertainty surrounding mad cow disease and plummeting cattle prices were causing some ranchers to take a wait-and-see approach before making additional investments in their cattle herds. In addition, the district's winter wheat crop remains dry and timely moisture will be needed for a good harvest.
Wages and Prices
Wage and price increases generally remained modest in December, although some materials prices continued to rise rapidly. Labor markets were still slack around the district. However, layoffs subsided considerably and more firms than in previous surveys reported problems finding and retaining workers. Among the workers reported to be in shorter supply were entry-level bank tellers and retail clerks, skilled technicians, and rig workers. Some builders also offered bonuses or new benefits in an effort to retain craftsmen. In addition, some contacts reported tentative signs of increased demand for tech workers, although such workers were still easily recruited. Most firms continued to offer only cost-of-living wage increases, while benefit costs continued to rise rapidly. As for prices, many retailers reported less pre-Christmas discounting than in previous years, and stores generally expect less post-holiday discounting as well. One retailer also anticipates raising prices slightly in coming months in order to match expected price increases by suppliers. Builders reported prices for construction materials remained well above year-ago levels in December, and prices are expected to ease little in coming months. Manufacturers reported a large rise in materials prices, especially for steel, and many expect price increases to continue in the near future. Contacts also expect an increase in freight costs due to recent legislation governing trucker hours. Manufacturers' finished goods prices continued to firm and managers increasingly expect to be able to pass some of their cost increases through to customers in the near future.
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Minneapolis