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Tenth District economic activity remained solid in December. Retailers reported exceptional holiday sales, residential construction held steady, and activity in the energy sector continued to improve. In the farm economy, crop prices remained low but cash flow problems eased due to good crop yields, higher livestock prices, and big government subsidies. The only sign of a slowdown was in manufacturing, where activity edged down after improving the previous several months. Labor markets remained very tight, with wage pressures still evident but no higher than in previous surveys. Retail prices were unchanged, while prices for some construction and manufacturing materials continued to rise.
Following a weak autumn, retail activity during December was very strong. Nearly all stores reported higher sales than a year ago, as the holiday shopping season got off to a roaring start and stayed strong through Christmas. Most respondents reported no adverse effect on their holiday sales from on-line retailers, and a few said they had success with their own web sites. Managers generally expect solid retail activity to continue into the spring. Sales were especially brisk for gift items such as toys, electronics, and jewelry; purchases of men's and women's dress wear and business attire remained weak. Some stores began trimming inventories immediately after the holidays, yet most were satisfied with current stock levels. Retailers reported some increase in demand for precautionary items such as bottled water and batteries as Y2K approached, but most stores said they had planned for this phenomenon and therefore experienced few inventory problems. Motor vehicle sales in December were generally stable, with sales in most parts of the district higher than a year ago. While car dealers expect slower sales in coming months due to typical seasonal factors, most were satisfied with current inventory levels.
District factory activity slowed after showing signs of improvement in recent months. Many plants that were operating at high levels of capacity utilization in October and November reported a dropoff to more moderate levels in December. Manufacturing materials remained generally available, although lead times for steel and steel products edged up. Many firms reduced their inventories in December and expect to continue trimming in coming months. Potential Y2K-related supply disruptions did not appear to concern most manufacturers.
After accounting for normal seasonal variation, housing starts held steady in December. Most builders also expect activity to remain stable over the next few months. Material availability continued to improve, although rationing of gypsum wallboard persisted in some areas. Home sales slowed in most of the district, but inventories of unsold homes remained at comfortable levels. Mortgage demand declined throughout the district in December, particularly for home refinancings.
Bankers reported that both loans and deposits increased somewhat last month, leaving loan-deposit ratios little changed. Demand fell for home mortgage loans but rose for commercial and industrial loans and commercial real estate loans. On the deposit side, demand deposits and NOW accounts increased due partly to seasonal factors, while money market deposit accounts, large CDs, and small time deposits were largely unchanged. At most banks, Y2K concerns appear to have had little impact on loans or deposits. Almost all respondents left their prime lending rates unchanged last month, but a few increased their consumer lending rates slightly. Most banks do not expect to increase their prime rates or consumer lending rates in the near future. Lending standards were generally unchanged.
District energy activity continued a turnaround in December that began in the spring with rising output prices. By the end of 1999, the count of active oil and gas rigs in the district had doubled from the March low. Drilling activity remained below the previous peak in late 1997, however, and district producers disagree on whether the recent increase in prices has improved the long-run outlook for the industry.
Bankers reported that initial year-end reviews of agricultural loan portfolios are better than expected. Crop producers benefited from good crop yields and big government subsidies, which eased cash flow problems caused by low grain prices. Low feed costs and strong cattle prices boosted profits for district ranchers and cattle feeders. As a result, bankers expect relatively few of their farm borrowers to be denied credit for the year ahead. The bankers also reported that farmland values and cash rents have generally held steady, despite low crop prices.
Wages and Prices
Labor markets remained very tight in December, with reports of labor shortages similar to the recent past. Entry-level workers in retail trade, construction, and manufacturing continued to be particularly difficult to find. Other positions experiencing acute shortages included building craftsmen, welders, truck drivers, nurses, and professional sales staff. Overall reports of rising wage pressures were similar to previous surveys, as there were more wage increases reported by builders and fewer reported by retailers. There were, however, reports of extensive job-hopping by retail workers during the holiday season, as workers sought to obtain higher wages. Retail prices were steady and are expected to stay largely unchanged through the spring. Prices for some manufacturing materials, especially steel, continued to edge up. Further increases in steel prices are anticipated. General increases in prices for construction materials were reported and are expected to continue.