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The Tenth District economy expanded moderately in late January and February. Manufacturing and tourism activity increased solidly, energy activity rose from already high levels, and labor markets continued to firm. In addition, retailers reported modest gains, home sales rose, and commercial real estate showed some improvement. On the negative side, auto sales fell slightly, and homebuilding eased. Retail price pressures remained modest. However, wholesale price pressures persisted, and wage pressures edged higher for some businesses.
Consumer spending in the district rose modestly in late January and February. Retailers and mall managers generally reported sales were up slightly from last year's solid levels. Sales of apparel were characterized as especially strong, due in part to post-holiday discounting. Store managers were generally satisfied with inventory levels, although a luxury department store plans to increase stock levels more than normal this spring due to expectations of stronger sales. Overall, retailers anticipate continued modest year-over-year sales gains in the months ahead. Motor vehicle sales fell slightly from the previous survey and were below year-ago levels throughout the district. A number of dealers noted some weakening in SUV sales, which have been particularly strong in recent years. Several dealers also reported stronger sales of used cars than new cars. Despite sluggish overall sales in recent months, most dealers were satisfied with inventory levels. Vehicle sales are generally expected to strengthen somewhat in the months ahead. Travel and tourism activity continued to improve in late January and February. Hotel occupancy rates were well above year-ago levels in the Rocky Mountain states, and airport traffic was up solidly from a year ago in most district cities.
District manufacturing activity continued to expand solidly. Overall, plant managers reported increases in production, shipments, and orders compared with the previous survey, and most firms said activity was stronger than a year ago. Employment at most district plants was unchanged from the previous survey after rising steadily during the past year. A number of manufacturers reported difficulties obtaining materials, especially those transported by rail. These difficulties are generally expected to persist and possibly to worsen. Plant managers remain quite optimistic about future production and anticipate modest increases in employment and workers' hours in the months ahead.
Real Estate and Construction
Residential construction activity continued to ease, but home sales rose slightly and commercial real estate showed modest signs of improvement. Builders generally report that single-family housing starts were down slightly from the previous survey but still close to year-ago levels. The strongest starts were reported for moderately-priced homes. No difficulties were reported in procuring construction materials. Most builders expect steady construction activity in the months ahead, with starts largely matching last year's strong levels. Based on reports from real estate agents, home sales in most district cities were up slightly from the previous survey and from a year ago. As with builders, the strongest activity was reported for middle-priced homes. Sales of luxury homes were reported as weak in several cities. Heading forward, nearly all real estate agents expect continued modest increases in home sales. Mortgage lenders reported a slight uptick in demand since the previous survey, though loan demand was generally weaker than a year ago. Most lenders said home purchase mortgages were making up an increasingly large portion of their business, and several noted a continued shift away from variable rate loans. Lenders generally expect some increase in mortgage demand heading forward, driven by home purchase loans. While commercial real estate activity in the district remained weak overall, some continued small signs of improvement were evident. Absorption rates in several cities were up from the previous survey, and vacancy rates were down from a year ago in a number of areas. Commercial real estate agents were also more optimistic about future improvements in office markets than in the previous survey.
Bankers report that loans held steady and deposits declined slightly since the last survey, causing loan-deposit ratios to edge upward. Demand rose for commercial real estate loans, edged down for home equity loans, and remained unchanged for other loan categories. A few respondents said business loan demand was lower than expected due to the cautious attitude of borrowers, but most bankers were optimistic about future loan demand. On the deposit side, money market deposit accounts and small time and savings deposits both fell slightly. Almost all respondent banks raised their prime lending rates since the last survey, and most banks also raised their consumer lending rates. Lending standards were unchanged.
District energy activity increased slightly from already high levels. The count of active oil and gas drilling rigs in the region edged up from the previous survey and was well above year-ago levels. Several contacts continued to report constraints on drilling due to labor and equipment shortages. Despite these constraints, most contacts expect continued modest expansion of drilling in the months ahead, as oil and gas prices are expected to remain high. One contact also said energy firms now expect strong drilling activity to continue for a longer period than in previous drilling booms.
Agricultural conditions generally remained solid in late January and February. The winter wheat crop received above average moisture in much of the district, and wheat producers are optimistic about crop conditions. Pasture conditions also improved, but most cattle producers do not expect to expand herds this year due to uncertainty about prices and concerns that the drought may not be over. Rural bankers report that rising energy costs are limiting irrigated land value gains.
Labor Markets, Wages, and Prices
Wage pressures increased modestly due to a firming labor market, and price pressures continued at the wholesale level. Labor markets showed further improvement, with hiring announcements outpacing layoffs. Most types of workers were readily available. However, many energy firms and some manufacturers reported increasing difficulties finding skilled workers, resulting in some modest increases in wage pressures in those industries. In addition, some firms were raising wages more than normal to attract or retain pharmacists, accountants, and truck drivers. Some types of computer programmers and retail workers were also reported to be in short supply, but employers were not markedly raising wages for those positions. Most retailers continued to report flat selling prices compared with the previous survey and expect little change heading forward. Builders reported further increases in some materials costs, such as for lumber and gypsum wallboard. Manufacturers also continued to report rising costs for a wide variety of materials, including petroleum-based inputs and several metals. In addition, slightly more plant managers than in previous surveys said they were passing cost increases through to customers. Heading forward, most manufacturers anticipate continued increases in materials prices and a moderate ability to pass on these costs.