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The Tenth District economy continued to expand moderately in September and early October. Expansion in the manufacturing sector was strong, and labor markets showed solid improvement. In addition, activity in the commercial real estate and energy sectors improved, and agricultural activity remained solid. On the other hand, consumer spending increased less than in previous surveys, and residential real estate activity eased slightly. Wage pressures edged down, but wholesale price pressures rose further and retail price pressures increased moderately.
Consumer Spending
Growth in consumer spending was somewhat weaker in September and early October than in previous surveys. Retailers, mall managers, and restaurants reported modest year-over-year increases in sales in September and early October, following stronger growth during most of the summer. Sales of apparel were generally reported to be strong, but several contacts noted that sales of "big-ticket" items such as electronics and jewelry were weak. Some retailers reported that stock levels were somewhat too high, although they plan few changes to inventories in coming months. Store managers were less optimistic about future sales than in previous surveys due to concerns about the impact of high energy prices on holiday spending. They generally expect sales to be flat to slightly higher in the months ahead. Most auto dealers reported a decline in vehicle sales as manufacturers' employee price discounts came to an end. Sales were down both from the previous period and from a year ago. Smaller, fuel-efficient cars were reported to be selling relatively well, while sales of trucks and SUVs were said to be weak at most dealerships. Most dealers believe that sales will remain sluggish in the months ahead due not only to the termination of employee price discounts but also to high gasoline prices. Travel and tourism activity in the district was largely unchanged in September and early October after expanding strongly in recent surveys. Most hotels reported that occupancy rates remain above year-ago levels. Tourism contacts generally expect activity to remain high in coming months.
Manufacturing
District manufacturing activity expanded strongly in September and early October. Many plant managers reported increases in production, shipments and orders from the previous survey, and factory activity was up considerably from a year ago. The strongest growth was reported by producers of durable goods, although producers of nondurable goods also noted continued solid gains. A number of firms reported that raw materials had become more difficult to obtain, due in part to transportation delays caused by Hurricanes Katrina and Rita. Manufacturers generally expect production to increase in the months ahead, although those firms that are heavy users of petroleum-based inputs tend to be less optimistic.
Real Estate and Construction
Housing activity eased slightly in September and early October, while commercial real estate continued to show modest improvement. Builders reported that housing starts generally declined somewhat from the previous survey, with starts below year-ago levels in some areas. In the months ahead, starts are expected to continue to ease in most areas. Although most builders said that they have had no significant problems obtaining materials, many expect that availability will become a problem in coming months. Real estate agents reported that home sales were generally flat since the previous survey and unchanged from a year ago. Several contacts noted an excess inventory of unsold homes in their markets. Year-over-year home price growth remained moderate in most areas, and realtors expect similar growth in home prices through the end of the year. Mortgage lenders reported that demand for new home mortgages and refinancings declined modestly since the previous survey. Commercial real estate activity in the district continued to improve modestly in September and early October. In several cities, vacancy rates edged down, while absorption rates and sales edged higher. Prices and rents for office and other commercial space were largely unchanged. Commercial real estate agents generally expect further slight improvements in office markets in the months ahead.
Banking
Bankers report that loans and deposits both edged up since the last survey, keeping loan-deposit ratios unchanged. Demand rose slightly for commercial and industrial loans, home equity loans and residential construction loans, while home mortgage demand fell slightly. On the deposit side, demand deposits and money market deposit accounts increased slightly, while other types of accounts held steady. All respondents increased their prime lending rates since the last survey, and almost all respondents also raised their consumer lending rates. Lending standards were unchanged.
Energy
District energy activity expanded solidly in late September and early October. The count of active oil and gas drilling rigs in the region continued to increase, although several contacts noted that they were still constrained by a lack of workers and equipment. Drilling is generally expected to increase further in the months ahead. Most contacts believe natural gas prices will continue to rise due to shut-in production in the Gulf of Mexico, and oil prices are also expected to remain elevated. Several contacts said oil and gas production in some parts of Wyoming will be boosted during the winter months by the lifting of seasonal drilling restrictions.
Agriculture
Agricultural conditions in the district remained solid in September and early October. Bankers report that warm, dry weather allowed for favorable harvest conditions. Many producers were able to take advantage of the weather to dry crops in the field rather than incur drying costs at elevators. However, following Hurricanes Katrina and Rita, producers faced lower prices for their crops due to transportation disruptions that significantly hampered grain exports. Winter wheat planting was progressing well due to the dry conditions, and cattle producers were benefiting from lower grain prices. However, high energy and fuel prices remain a key concern heading forward.
Labor Markets and Wages
Labor markets continued to firm in September and early October, but wage pressures edged down. Hiring announcements exceeded layoff announcements by a sizeable margin, and the percentage of contacts experiencing labor shortages rose slightly from the previous survey. Specific types of workers reported to be especially difficult to find included rig workers, retail salespeople, and resort staff. Nonetheless, the percentage of firms reporting wage pressures was lower than in recent surveys, as was the percentage of contacts expecting wage pressures to increase in the months ahead.
Prices
Wholesale price pressures continued to rise in September and early October, and retail price pressures also increased moderately. The share of manufacturers reporting materials price increases was the highest on record. Price increases were reported for a wide variety of inputs, including steel and petroleum-based materials. Transportation costs were also reported to have increased sharply. The share of manufacturers raising output prices also rose, and plant managers expect materials prices and output prices to rise still further in the months ahead. Most builders reported increased costs for a wide range of materials, and they expect that prices will continue to rise in the months ahead. More retail stores than in the previous survey reported raising selling prices, and many stores plan further increases in prices going forward. Hotels generally reported higher daily room rates than in the previous survey, and additional increases are expected in coming months.
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