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Economic activity in the Tenth District deteriorated in December. Consumer spending weakened, and expectations for future spending declined further. Manufacturing activity dropped sharply, and both commercial and residential real estate activity continued to contract. Energy activity decreased markedly in response to falling natural resources prices. Contacts lowered expectations for future farm income, but growing conditions in the agriculture sector improved. Bankers reported increasing deposits, declining loan demand, and deteriorating loan quality. Prices continued to fall for raw materials and, to a lesser extent, finished products. Labor market conditions weakened further, leading to fewer wage pressures and lower salary increases for 2009.
Consumer Spending
Consumer spending was generally down in December, and expectations fell across all sectors for the months ahead. Retail sales were lower than last year, and contacts reported that heavy discounting cut profit margins at many stores. Sales were especially weak for large-ticket durable goods, jewelry, and high-end merchandise. Retail and mall contacts anticipated sluggish sales in the coming months. Auto sales weakened from the previous period, and all contacts expected further contraction in the months ahead. Inventory levels were unchanged since the last survey, but most auto dealers said inventories were still too high. Auto credit tightened further, and dealers struggled to obtain financing for buyers. Travel and tourism activity declined in December, with one contact noting a pullback from foreign travelers. Hotels in the mid- and lower-tiers fared better than upscale properties. Restaurant sales improved from the previous survey but were still lower than year-ago levels. Restaurant contacts anticipated less traffic in the next three months.
Manufacturing and Other Business Activity
Manufacturing and other business activity weakened during the latest survey period. Overall, production fell across all types of manufacturing. Plant managers also reported declines in shipments, new orders, and order backlogs. Firms continued layoffs, and many shortened the length of the average employee workweek. Companies with ties to the automotive and railroad industries experienced the greatest number of layoffs. Expectations for future factory activity remained pessimistic, and plants cut their capital spending plans sharply. Firms anticipated lower production, fewer shipments and a smaller number of new orders in the months ahead. Export orders fell further, and firms remarked that they could no longer rely on foreign markets. Transportation services activity slowed during December and was expected to be flat over the next few months. Firms cut back on capital spending, and one trucking firm said that it was driving more empty miles. Another trucking company said that for the first time in two years it had enough qualified drivers.
Real Estate and Construction
Residential and commercial real estate activity slowed further in December. Home sales decreased from the last survey period, and contacts expected sales to be flat in the coming months. Home inventories were unchanged since the previous survey and were close to year-ago levels, though still quite elevated. Prices continued to drop, and expectations of lower prices in the future were common. Mortgage lenders reported an increase in home refinancings in response to lower interest rates. Commercial real estate activity declined across all segments: office, retail, hotel, and industrial. Contacts expected depressed prices, higher vacancy rates, and lower absorption rates. Rental rates also fell considerably, with levels well below a year ago.
Banking
Bankers reported a decline in loan demand, deterioration in loan quality, and increase in deposits since the last survey. The net fraction of banks reporting lower overall loan demand was about the same as in the previous survey. Demand fell for commercial and industrial loans, commercial real estate loans, and consumer installment loans. However, demand for residential real estate loans was unchanged following significant declines in the previous two surveys. Compared to the last survey, there were more reports of tighter standards on commercial and industrial loans but fewer on residential real estate loans. Tighter standards were particularly prevalent for commercial real estate loans. Assessments of current loan quality were little changed from the last survey, but expectations for future loan quality declined further. Just over half of respondents reported increases in deposits. A few banks said maintaining margins between interest income and interest expense was becoming more difficult with interest rates falling so sharply.
Energy
Energy activity slowed dramatically in December as oil and natural gas prices continued to fall. Almost all contacts reported a decrease in drilling activity over the last month, and all contacts expected activity to continue to decline over the next three months. The number of active drilling rigs in the District fell during the latest survey period and reached the lowest level since late 2005. Furthermore, oil and gas firms were cutting their capital spending budgets and other costs due to the fall in energy prices. Most contacts believed that the downturn in prices was demand driven, but they were somewhat hopeful that demand for natural gas and other heating products would support activity during the winter months.
Agriculture
Agricultural growing conditions improved in December, but farm income expectations weakened. The winter wheat crop was reported in good condition due to adequate fall moisture, and corn and soybean prices rebounded slightly from harvest-time lows. But with commodity prices well below summer highs, rents and prices for cropland eased, although they remained well above year-ago levels. Farm input costs eased slightly with lower fuel and fertilizer costs. Despite reduced feed costs, however, the livestock sector continued to struggle with waning global demand for meat products. Farm income expectations weakened further, and District contacts reported a reduction in capital spending. The availability of funds for agricultural loans held steady while collateral requirements increased further.
Wages and Prices
Price pressures continued to ease, and wage pressures also diminished in December. Raw materials prices fell sharply, and manufacturers in general reported a corresponding decline in finished product prices. Trucking contacts also reported that input prices, including fuel, continued to fall from the record highs of the summer. Retail and restaurant contacts lowered prices and anticipated further declines in the months ahead. Labor shortages were minimal, and wage pressures diminished. The number of contacts expecting to hire additional workers in the next few months fell drastically. One contact commented that projected salary increases for 2009 were the lowest since 2001. Many contacts trimmed labor costs by reducing their workforce, eliminating overtime, shortening the workweek, and lowering bonuses.
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Minneapolis