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The Tenth District economy expanded moderately in late April and May. Consumer spending rose solidly, labor markets continued to firm, and commercial real estate activity improved slightly. In addition, energy activity and residential real estate activity remained at high levels. Manufacturing activity showed little growth following two years of expansion. Agricultural conditions weakened somewhat. Wages and retail prices rose modestly, while wholesale price pressures eased slightly.
Consumer Spending
Consumer spending in the district expanded solidly in late April and May. Most retailers, mall managers, and restaurants reported increased sales since the previous survey despite a modest negative impact from high gasoline prices. Sales were generally higher than a year ago and at or above plan for the period. Sales of many types of apparel were characterized as particularly strong, while sales of home items were weak at several stores. A number of stores increased inventories since the previous survey, and most managers are now satisfied with current stock levels. Nearly all store managers were optimistic about sales this summer. Motor vehicle sales were flat compared with the previous survey and were below plan at many dealerships. Sales generally remained slightly weaker than a year ago. Sales of large SUVs and trucks were reported as weak in most areas, while smaller and more fuel efficient models sold well. A number of dealers also reported solid sales of used vehicles. Virtually all dealers expect some improvement in vehicle sales in the months ahead. Travel and tourism activity in the district improved further in late April and May. Nearly all hotels reported increased occupancy rates since the previous survey, and occupancy rates in some locations were at the highest level in several years. Most hotel and resort operators were optimistic about summer travel activity, expecting little if any impact from high gasoline prices.
Manufacturing
District manufacturing activity was largely stable in late April and May following two years of expansion. Plant managers reported little growth in production and employment since the previous survey. However, factory activity generally remained well above year-ago levels. Several firms noted increased supplier delivery times, as truckers were avoiding less-than-truckload shipments in an effort to control costs. Some factories were also delaying their own shipments to ensure full truckloads. Most plant managers remained optimistic about the future, and a sizable share of factories plan to expand their workforces in the months ahead. Many firms also plan to increase capital spending in the second half of the year, due to expectations of increased sales and the need to expand and replace plant and equipment.
Real Estate and Construction
Residential real estate activity remained solid in late April and May, and commercial real estate activity improved slightly. Builders reported that home starts were generally unchanged since the previous survey and down slightly from year-ago levels, although still high by historical standards. Most builders expect new home construction to remain flat in the months ahead. Real estate agents reported increased home sales from both the previous survey and a year ago. As in the previous survey, agents in several cities noted that sales were being boosted in part by out-of-state investors. Home prices were reported as increasing at moderate rates throughout the district. Most agents expect slight increases in home sales and home prices in coming months. Mortgage lenders generally reported increased mortgage demand since the previous survey. The increase was driven by higher demand for home purchase loans, as refinancing activity was flat. Overall, mortgage lenders remain optimistic about future demand for home purchase loans. Commercial real estate activity in the district improved slightly in late April and May. Vacancy rates edged down in several cities, and prices and rents for office space were up modestly. Commercial real estate agents expect activity to be stable or to improve slightly in the months ahead.
Banking
Bankers report that loans edged up and deposits decreased slightly since the last survey, raising loan-deposit ratios somewhat. Demand rose slightly for commercial and industrial loans and commercial real estate loans but edged down for consumer loans. On the deposit side, demand deposits, other checkable deposits, and large CDs edged down, while other types of accounts held steady. Almost all respondents increased their prime lending rates since the last survey, and most respondents raised their consumer lending rates. Lending standards were unchanged. Banks do not plan to increase capital spending in the second half of the year, in some cases because they invested heavily in information technology in 2004.
Energy
District energy activity remained strong in late April and May. The count of active oil and gas drilling rigs in the region was basically unchanged from the previous survey but still much higher than in recent years. Most drilling firms expect moderate expansion of drilling activity in the months ahead, as energy prices are expected to remain high. In addition, several contacts noted improved conditions in the coal industry in Wyoming since the beginning of the year, as both spot and futures prices for coal have risen considerably.
Agriculture
Agricultural conditions in the district weakened somewhat in late April and May. A late freeze and heavy spring rains complicated spring planting in certain areas and forced some producers to replant crops. In addition, producers reported that the condition of the winter wheat crop had deteriorated somewhat since the previous survey due to drought and freeze damage. Pastures, on the other hand, were in good condition, providing adequate spring forage. Farmers' capital spending for the rest of the year is expected to decline somewhat from a year ago due to the higher cost of fuel and fertilizer and lower farm incomes this year.
Labor Markets and Wages
Labor markets in the district continued to firm in late April and May, but wage increases remained modest. Private sector hiring announcements since the previous survey exceeded layoff announcements by a sizable margin. In addition, the military base realignments announced in May were expected to boost both military and civilian employment in the district. The percentage of firms reporting worker shortages was slightly less than in recent surveys. However, several types of workers were still reported to be in short supply, including truck drivers, rig workers, welders, machinists, and both entry-level and experienced retail workers. In addition, college placement offices in the region reported a solid increase in job offers compared with recent years. Firms generally reported that wage increases remained modest, but some contacts said benefit costs rose more than normal.
Prices
Modest price pressures persisted at the retail level in late April and May, while price pressures eased somewhat at the wholesale level. As in the previous survey, most retailers reported flat selling prices, but a sizable number raised their selling prices or delivery charges to offset increased costs. A sizable number of stores also plan to raise prices in the months ahead. Several builders reported increased costs for framing materials, and some expect these increases to persist. Fewer manufacturers than in recent surveys reported rising materials costs, and one firm said chemical prices had fallen due to weaker demand in Asia. Plant managers generally expect moderate increases in materials prices heading forward. The share of manufacturers raising output prices was also lower than in the previous survey, but many plant managers still expect to raise output prices in the months ahead.
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Minneapolis