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The Tenth District economy expanded at a modest pace in late November and December. Consumer spending softened, with weakness in auto, restaurant, and tourism sales. District manufacturing activity contracted slightly, though factory operators remained optimistic about growth in the coming months. High-tech firms reported continued strong growth, while transportation activity was flat. Residential and commercial real estate conditions remained broadly weak, but contacts expressed increased optimism about sales and prices in the coming months. District banks reported generally steady loan demand and improved loan quality. High crude oil prices buoyed activity in the District's energy sector. Agricultural growing conditions improved, but higher input and production costs constrained farm profits. Rising input costs were reported in several sectors, but few District contacts noted either hiring shortages or wage pressures.
Consumer Spending
Consumer spending softened in late November and December, with a slowdown in the auto, restaurant, and tourism sectors. Many District contacts attributed the weakness in spending to ongoing regulatory and political uncertainty. Most retailers, however, expected spending to rise over the next three months. Following several months of strong activity, auto dealers reported a dip in sales with slower sales expected in coming months. Auto inventories increased over the previous survey period, and most dealers reported satisfaction with current levels. Restaurant sales were flat despite larger average check amounts. However, restaurant contacts expected sales to rebound over the next three months. Tourism activity slowed, as winter storms hampered some tourist activity but helped ski resorts. Hoteliers reported lower occupancy rates but stable average room rates.
Manufacturing and Other Business Activity
Manufacturing activity contracted slightly during the survey period, but factory operators remained optimistic about the coming months. Activity was broadly weaker, with production, shipments, and new orders lower relative to the prior survey. The weakest sectors were food processing and fabricated metals, while growth in machinery and high-tech manufacturing remained strong. Order backlogs, manufacturing employment, and average hours worked declined. Despite weaker activity, expectations were positive for the coming months for production, shipments, and orders. Transportation firms reported mostly unchanged conditions as activity remained well above year-ago levels. Most high-tech services firms reported sales gains and increased capital spending. Contacts in both the transportation and high-tech sectors reported continued difficulty finding skilled workers.
Real Estate and Construction
Residential and commercial real estate activity remained sluggish in late November and December. District home prices were flat, but most real estate contacts expected prices to rise along with home sales over the next three months. Multiple contacts reported multi-family housing as a source of strength in the housing market. Mortgage lenders reported weak mortgage demand with fewer home purchases and refinancings relative to the previous survey period. Lenders cited stricter mortgage lending requirements as a key factor underlying weak loan demand. Housing starts declined further, and expectations about future construction activity remained subdued. Construction supply firms reported weak sales over the survey period, and most expected little change in activity over the coming months. Commercial real estate sales, prices, and vacancy rates improved, and District contacts were more optimistic about the coming months. Rents on commercial properties were stable and expected to rise over the next three months. Developers reported little change in access to credit.
Banking
Almost all bankers reported generally steady loan demand, stable or improving loan quality, and increased deposits. Loan demand by category was mixed. Most respondents reported steady loan demand for commercial and industrial loans, commercial and residential real estate loans, and consumer installment loans. Remaining respondents were split between stronger and weaker demand within each of these categories. Credit standards remained largely unchanged in all major loan categories and deposits increased for the eighth straight survey. Bankers generally reported loan quality as steady or improving compared to a year ago and reported the outlook for loan quality over the next six months as steady or improving.
Agriculture
Agricultural growing conditions improved in late November and December but farm income prospects dimmed with high input costs. Timely rains eased drought conditions in the Southern Plains. Most of the winter wheat crop emerged in good condition, though more protective snow cover was needed for the winter dormancy period. Volatile crop prices and high input costs tempered crop profit expectations for the coming year. High production costs trimmed margins for livestock operators even though strong export demand underpinned prices. Still, with historically high profits, many farmers were repaying operating loans, buying farmland and purchasing additional machinery and equipment. District contacts reported an increase in the number of farmland auctions as record high land prices enticed more landowners to sell.
Energy
District energy and mining contacts reported continued strong activity in late November and December and remained optimistic about the coming months. Drilling rig counts were flat in most District states but remained well above year-ago levels. Drilling continued to shift away from dry natural gas and toward liquid-rich formations. However, crude exploration in the Niobrara formation in Wyoming slowed as contacts reported better opportunities in other areas. Producers expected stable crude prices but relatively weak natural gas prices over the next three months. Attracting qualified workers and finding adequate equipment remained a concern for oil and gas contacts. District coal production declined slightly in November and December and remained below year-ago levels. A recent drop in ethanol prices trimmed margins for ethanol producers despite lower input costs and strong export demand.
Wages and Prices
District contacts reported higher prices for both inputs and finished goods, but wage pressures remained confined to select industries and occupations. Manufacturers reported an uptick in input prices in late November and December, but relatively few reported higher finished goods prices. Manufacturers expected further price increases for both inputs and finished goods in the coming months. Most restaurants reported a continued rise in food costs and expected further increases over the next three months. Retailers and transportation firms increased prices in the latest survey period, while construction suppliers reported falling prices due to weak building demand. Few contacts outside of the energy, high-tech, and transportation sectors reported either hiring shortages or upward wage pressures, and most expected little wage pressure in the coming months. Rising employee benefit costs, particularly for health care, remained a concern for many contacts.
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Minneapolis