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The Tenth District economy remained sluggish in January and early February. Retail sales were soft in much of the district, residential building was flat, and commercial construction edged down. Manufacturing continued to be the weakest sector, as activity declined further. On the positive side, energy activity continued to benefit from high oil and gas prices. In the farm economy, snowfall improved growing conditions for the winter wheat crop but high energy prices pushed up production costs. District labor markets remained tight, although recent layoffs appeared to have eased labor shortages somewhat. Wage pressures remained largely subdued. Retail prices edged down due to heavy discounting, while prices for petroleum-based manufacturing materials continued to rise.
Retail sales in January and early February were at or below year-ago levels in much of the district. Cosmetics and electronics sold well, while sales of decorative items and men's clothing were weak. Most retailers said they expected sales to improve in the spring, although other contacts expressed concern about the shaky state of consumer confidence. Motor vehicle sales remained lower than a year ago in most parts of the district. Inventories of unsold cars continued to build, and many dealers have delayed purchasing new vehicles. However, signs of recovery were evident in some areas, which dealers attributed in part to extensive dealer incentives and favorable credit conditions. Dealers were also more optimistic than in previous surveys about sales in coming months.
District factory activity fell further, with more firms reporting medium and low levels of capacity utilization than in previous surveys. Furthermore, capital expenditures at district plants were down from a year ago, and purchasing managers were less optimistic about future factory activity than in the recent past. Manufacturing materials remained generally available and lead times were virtually unchanged. Managers do not anticipate many material availability problems in coming months. Firms continued to trim inventories but most managers were still not satisfied with current stocks and plan to trim further through the spring.
Real Estate and Construction
Residential construction activity remained subdued in January and early February, and commercial building declined slightly. Housing starts in most of the district were unchanged from December and below year-ago levels. However, some builders expect residential construction to rise more than the usual seasonal amount over the next three months. Sales of new and existing homes fell in most of the district, and inventories of unsold homes were up from a year ago. Mortgage demand rose considerably, but the increase mainly reflected the boost to refinancing activity from lower mortgage rates. Lenders expect refinancing activity to remain strong through the spring. Commercial construction activity edged lower, amid reports that uncertainty about the economy was causing some builders to become more cautious. Vacancy rates generally held steady, although cutbacks by troubled high-tech firms led to an increase in space available for sublease in one major market. Commercial Realtors continued to express concern about possible overbuilding in some markets.
Bankers report that loans declined and deposits increased since the last survey, reducing loan-deposit ratios somewhat. Demand eased for all major loan categories except home mortgage loans and home equity loans, both of which were flat. On the deposit side, demand deposits, NOW accounts, and small time deposits were all up, while other categories were unchanged. All respondent banks reduced their prime lending rates, and half the banks also decreased their consumer lending rates. Most respondents said they did not expect to adjust these lending rates further in the near term. Lending standards were generally unchanged from the previous month.
District energy activity continued to rise, as energy prices remained high by historical standards. The count of active oil and gas rigs was up only slightly from the beginning of the year, but mainly because expansion continued to be constrained by the availability of new rigs. Reports suggest that these supply constraints might ease somewhat in coming months, as several newly built rigs begin working in the district. Oil prices remained largely unchanged from December, while natural gas prices retreated but were still over twice as high as a year ago.
Recent snowfall replenished soil moisture and improved growing conditions for the district's winter wheat crop, which had been hurt by last autumn's dry weather. Due to the dry conditions early on, fewer wheat fields were suitable for grazing this winter, but other forages were in ample supply. High energy prices have raised fertilizer prices, pushing up production costs and encouraging producers to shift some spring plantings from corn to soybeans and other crops that require less fertilizer. District bankers indicate government payments to farmers limited deterioration in farm loan portfolios. Nevertheless, bankers remained concerned about prospects for the weak farm economy. Small business activity in rural areas remains sluggish, especially in farm-dependent communities.
Wages and Prices
While district labor markets remained tight in January and early February, numerous contacts reported seeing some signs of easing. Some manufacturing and construction workers were more readily available than in previous surveys, and recent layoffs at Internet and telecommunications firms have helped ease the extreme shortage of high-tech workers. On the other hand, the markets for entry-level and health care workers remained very tight. The proportion of business contacts reporting increased wage pressures remained lower than in recent years. However, there were some reports of improvements in benefit packages for entry-level workers. Retailers have been discounting more than in previous years, but expect prices to return to normal in the near future. Prices for petroleum-based manufacturing materials continued to rise, and some firms expect a further increase in coming months. Building material prices remained largely unchanged.