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The Tenth District economy remained very sluggish in late January and February, but some small signs of improvement were reported. Manufacturing activity fell further, automobile sales and residential construction activity declined, and commercial real estate activity remained weak. On the positive side, however, retail sales excluding autos edged higher, home sales strengthened, and energy activity stabilized. In the farm economy, dry weather continued to hinder the development of the winter wheat crop. District labor markets remained considerably less tight than a year ago, and wage pressures were largely nonexistent. Retail prices and prices for construction materials were flat, while prices for several manufacturing materials edged lower.
Retail sales edged up in late January and February following a better-than-expected holiday season, and were above year-ago levels in most stores. High-end retailers, however, continued to report sluggish sales. Many retailers in Kansas, Oklahoma, and western Missouri lost sales when they were forced to close due to power outages caused by a late January ice storm. Home furnishing items continued to sell particularly well across the district. Nearly all retailers expect sales to increase in coming months. Inventory levels held steady, and most managers reported they were satisfied with their stocks. Most stores, however, expect to expand stock levels heading into the Easter season. Colorado ski resort operators reported that while activity has been below year-ago levels, it has not been as weak as they feared in the fall. Motor vehicle sales in the district continued to fall from the record sales seen late in 2001 and lot inventories were growing more quickly than some dealers preferred. Still, dealers were cautiously optimistic that sales would rebound by summer.
District factory activity declined again, but optimism about future production continued to build. Production and orders fell farther below year-ago levels, and employment and capital expenditures showed little sign of improvement. Auto plants in the region experienced brief losses of production as a result of the late January ice storm. One plant expects to make up the lost production sometime in March. On the positive side, an increasing percentage of district manufacturers expect a turnaround by mid-year. Inventory levels held steady after falling sharply over the past year, but are expected to resume declining in coming months. Some firms reported difficulties receiving steel shipments, but no other significant shortages of materials were reported or expected for the foreseeable future.
Real Estate and Construction
Home sales strengthened in most of the district, but residential construction activity declined in most district states, and commercial real estate markets remained very weak. Residential sales improved in most areas, with the exception of higher-end homes. However, inventories of unsold homes still remain high, and housing starts fell outside of Oklahoma and New Mexico. Most builders expect the sluggish activity to continue for several months. Commercial realtors continued to report weakness in most district office markets, especially in Denver. With absorption remaining slow, vacancies have continued to edge up, and were significantly higher than a year ago in February. Lease concessions such as rent abatement and moving allowances continued to be reported in some markets. However, realtors reported prices for office space were down only slightly, as most sellers are still in good financial position and expect the market to turn around once the economy recovers.
Bankers report that loans fell and deposits increased since the last survey, reducing loan-deposit ratios. Demand fell for commercial and industrial loans, residential construction loans, and commercial real estate loans. Demand held steady for home mortgages and edged up for home equity loans. Refinancing activity slowed but was described by some bankers as still strong. On the deposit side, demand deposits, NOW accounts, and money market deposit accounts all increased, while large CDs and small time deposits remained unchanged. Bankers attributed the increase in liquid deposit accounts to low market interest rates and a wait-and-see attitude by investors. All respondent banks reduced their prime lending rates, but most banks left their consumer lending rates unchanged. Lending standards were unchanged.
Energy activity in the district remained steady in late January and February. The region's count of active oil and gas drilling rigs stayed near the two-year low reached in late 2001. In Wyoming, higher coal prices have reportedly led to some expansion of mining activity and have intensified efforts to increase rail service from the Powder River Basin to coal markets.
Much of the district's winter wheat crop was in below-average condition due to dry weather. The dry weather has also limited grazing on district wheat fields, but other forages have been in ample supply for feeding cattle this winter. District farmers remained concerned about the weak farm economy and were hesitant to take on additional debt. District bankers, however, reported strong farm balance sheets with farmland values holding steady. To date, major problems in district farm loan portfolios have been avoided through government payments to farmers. Small business activity in rural areas remained sluggish and expectations point toward a slow recovery at best.
Wages and Prices
District labor markets remained considerably less tight than a year ago, but a slightly higher percentage of firms reported shortages of some kinds of workers than in the previous survey. Occupations experiencing shortages included welders, skilled construction trades, and nurses. There were also some tentative signs of increased demand for entry-level retail and service workers. Some hospitals reported expanding the use of nontraditional hiring incentives, including grocery allowances and housecleaning services, in an effort to attract nurses. Evidence of wage pressures outside the occupations experiencing shortages remained virtually nonexistent. Some firms reported they were delaying annual wage increases for six months or more. Many employers also continued to increase employees' share of health care costs. Retail prices largely held steady and are expected to remain flat in coming months. Prices for most manufacturing materials, including many plastics and paper products, have declined. Meanwhile, steel prices have risen somewhat and are expected to increase further. Prices for construction materials were basically flat, but many builders were concerned that prices for gypsum wallboard would increase in the near future.