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The Tenth District economy continued to expand in late July and August, although at a slightly slower pace than in the previous survey. Consumer spending increased solidly, and activity also improved in the commercial real estate, energy, and agricultural sectors. Expansion in manufacturing activity and labor markets was slower than earlier in the summer, and residential construction edged down. Wholesale price pressures increased considerably, and retail price pressures and wage pressures edged higher.
Consumer spending in the district expanded further in late July and August. Most retailers, mall managers, and restaurants continued to report solid year-over-year increases in sales. Contacts were generally pleased with back-to-school sales, and sales of appliances were also noted as particularly strong by several store managers. Most retailers were satisfied with current stock levels and plan few changes to inventories in coming months. Nearly all store managers remain optimistic about future sales, although a few expressed concerns about the impact of rising gasoline prices. Auto dealers reported continued strong growth in vehicle sales, driven largely by the continuation of manufacturers' employee price discounts. Virtually all dealers said sales were higher than a year ago. Sales of new vehicles, especially trucks and SUVs, were reported to be especially strong, while sales of large cars and used vehicles were said to be weak at some dealerships. Many dealers believe discount programs have drawn from future sales and thus expect a sizable sales dropoff once the discounts end. Travel and tourism activity in the district continued to rise in late July and August. Hotels generally reported increased occupancy rates from both the previous survey and a year ago, and several contacts expressed surprise at the apparent lack of impact from high gasoline prices. Most tourism contacts expect further increases in activity in coming months.
District manufacturing activity expanded modestly in late July and August. Factory activity remained stronger than a year ago, but fewer plant managers reported recent increases in production, shipments, and orders than in the previous survey. Firms generally expect production to increase in the months ahead, although some producers of petroleum-based products and trucking equipment were worried about the impact of high oil and gasoline prices on future sales. Capital spending at district manufacturing plants continued to increase solidly, and many firms plan further expansions in plant and equipment in the months ahead. Consistent with this, expectations for future sales among producers of capital equipment were very high. Some plant managers reported difficulties obtaining materials, due in part to rail transportation delays, but most materials remained generally available.
Real Estate and Construction
Housing activity showed some signs of easing in late July and August, while commercial real estate activity improved further. Builders generally reported that housing starts edged down from the previous survey. Despite the recent decline, construction remained close to year-ago levels overall, with starts down slightly in several cities but up considerably in others. Starts are expected to ease further in coming months in most areas. Several builders reported difficulties obtaining cement, but other building materials were generally available. Real estate agents reported that home sales were up slightly from both the previous survey and a year ago. However, inventories of unsold homes were up considerably from a year ago in some markets. Year-over-year home price growth remained moderate in most cities, and Realtors expect little growth in home prices in the months ahead. Mortgage lenders reported a drop in refinancings. Overall demand for new home mortgages was steady, although demand for investment property mortgages continued to rise. Several lenders noted a slight increase in requests for non-traditional mortgages. Mortgage lenders expect overall loan demand to remain steady in the months ahead. Commercial real estate activity in the district continued to improve in late July and August. Vacancy rates were flat or down slightly across the district, and prices for office and other commercial space were up modestly in most cities. Commercial real estate agents generally expect further improvements in office markets in the months ahead.
Bankers report that loans edged up and deposits held steady since the last survey, boosting loan-deposit ratios somewhat. Demand rose slightly for consumer loans, home equity loans, and residential construction loans. Demand for home mortgage loans, commercial and industrial loans, and commercial real estate loans was little changed. On the deposit side, all types of accounts held steady. Almost all respondents increased their prime lending rates since the last survey, and half of respondents also raised their consumer lending rates. Lending standards were unchanged.
District energy activity expanded solidly in late July and August. Although several contacts continued to cite shortages of rigs and workers, the count of active oil and gas drilling rigs in the region increased for the first time in several surveys. Most energy firms plan further increases in drilling in the months ahead, as they expect natural gas prices to increase slightly and oil prices to remain high. To help transport increased natural gas output from the Rocky Mountains, several new pipelines are either under construction or being planned.
Agricultural conditions in the district improved slightly in late July and August. Rural bankers reported that cooler temperatures and recent rains helped improve the condition of the soybean crop, which had been under considerable stress. However, the recent rainfall is expected to provide little, if any, boost to corn yields this late in the growing season. In the livestock market, cattle prices fell due to rising U.S. cattle supplies, renewed live cattle imports from Canada, and limited demand growth. Nevertheless, cattle producers were generally optimistic about future activity.
Labor Markets and Wages
Labor markets continued to firm, though at a somewhat slower pace, while wage pressures edged higher. Hiring announcements continued to exceed layoff announcements, but by a smaller margin than in the previous survey. Also, the percentage of contacts experiencing labor shortages was unchanged after rising in previous surveys. Still, two large MBA programs in the district said demand for their graduates was much higher than a year ago, and many firms noted difficulties finding specific types of workers, such as mechanics, machinists, welders, rig workers, hotel workers, and retail salespeople. The percentage of firms reporting wage pressures ticked up slightly from recent surveys, although the share remained much lower than before the last recession. A higher percentage of contacts than in recent surveys expect wage pressures to increase slightly in the months ahead.
Wholesale price pressures increased considerably in late July and August, and retail price pressures edged up. The share of manufacturers reporting materials price increases rose sharply after easing in recent surveys. Price increases were reported for a wide variety of inputs, but especially for petroleum-based materials. The share of manufacturers raising output prices also increased, and a higher percentage of plant managers than in previous surveys expect materials prices and output prices to rise in the months ahead. Most builders also reported increased materials costs, especially for cement, although prices for lumber generally eased somewhat. Somewhat more retail stores than in the previous survey reported raising selling prices, and a number of stores plan further increases in prices. Hotels generally reported higher daily room rates than in the previous survey, and additional increases are expected in coming months.