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Economic growth in the Tenth District slowed in September after posting stronger growth in the previous survey period. Overall, consumer spending weakened and expectations for future sales softened. Manufacturing production and orders received declined modestly despite solid export activity. Residential and commercial real estate activity slowed, partly due to worsening credit conditions. Bankers reported tighter credit standards, lower loan demand, and weaker loan quality. The energy sector expanded and agricultural conditions were favorable, despite lower commodity prices. Inflationary pressures were more subdued as fewer manufacturers reported gains in input and finished goods prices. Wage pressures eased amid softer labor markets.
Consumer spending weakened in September and was expected to ease further in coming months. Retail sales fell after a modest rise in the last survey period. Store managers reported heavy traffic at discount retailers, while department stores continued to struggle. Trucking companies noted lighter shipments as retailers planned to stock less holiday merchandise. Auto sales leveled off after several months of decline, partly due to aggressive incentive and discount programs. Auto dealers noted an uptick in used car sales, especially for fuel efficient models. Auto dealers also anticipated further tightening in credit conditions that would dampen sales. Tourism activity slowed as vacation travel waned and hotels reported fewer business travelers. Air travel remained strong in Denver, but passenger traffic slowed in other District markets. Restaurants noted fewer patrons.
Manufacturing activity declined modestly after rebounding in the previous survey period. Production of durable goods held steady, while output fell at plants producing non-durable goods. Orders, shipment volumes, and order backlogs declined, stabilizing inventory levels. Export activity remained solid. One District contact reported a lack of shipping containers for perishable goods. Some plant managers reported delivery disruptions due to Hurricane Ike. Expectations for future factory activity dropped sharply as manufacturers anticipated further slowing in orders. Capital spending plans were largely unchanged although several agricultural equipment manufacturers announced future plant expansions.
Real Estate and Construction
Residential and commercial real estate activity slowed in September. The residential housing market remained weak despite a brief summer uptick in sales. Prices have declined in markets not heavily tied to agriculture and energy. Inventory levels remained well above year-ago levels even though the number of residential building permits continued to trend down. Real estate agents reported more demand for lower priced homes, especially from investors who were interested in buying rental properties. Tighter credit conditions were expected to further hamper sales as the market enters a seasonal slowdown in activity. While mortgage originations for home purchases declined, District contacts reported that the number of borrowers refinancing their mortgage loans, either for cash-out or to lower their monthly payments, rose in September. Commercial real estate activity slowed further as the number of sales dropped despite modest price declines. Increased equity requirements and more difficulty accessing credit meant some construction projects were placed on hold or cancelled. Rental rates stabilized, but were expected to decline due to an anticipated rise in vacancy rates. Absorption rates declined further and remained below year-ago levels.
In September, bankers reported lower loan demand, tighter credit standards, and weaker loan quality. Demand fell for all major loan categories, with commercial real estate and residential real estate loans showing the greatest declines. Nearly three-fourths of bankers reported tighter credit standards for commercial real estate loans, up from half of respondents in the previous survey. Almost half of respondents reported tighter standards for commercial and industrial loans, up from a quarter in the previous survey. Banks also reported some tightening of standards for consumer and residential real estate loans, though not as much as for commercial loans. Assessments of current loan quality were weaker than in the previous survey, and banks were also more pessimistic about future loan quality. Bank deposits increased, and a few banks noted that inflows of funds under the FDIC insurance limit were making up for outflows of funds above the limit. When asked about the recent financial turmoil, most banks said the crisis had caused them to become more cautious in their lending and investment and liquidity management.
Energy activity strengthened further in the survey period, even with lower energy prices. The number of active drilling rigs in the District rose to a record high in September, driven by greater exploration in New Mexico. Energy demand was expected to strengthen with the winter heating season. Producers expected drilling activity to hold at elevated levels in the coming months. Wyoming coal production was up in September, as well as year-to-date. Energy companies reported that financing remained available, but shortages of equipment and qualified workers persisted. Expansions in bio-fuels production slowed with lower gasoline prices and relatively high crop prices.
Agricultural conditions remained favorable in September. The corn and soybean harvest has begun and initial reports indicated above average yields. The harvest, however, was behind schedule due to late planting that delayed crop maturity. Winter wheat planting was progressing on schedule. Exports of U.S. beef and pork rose, but high feed costs squeezed profit margins for livestock operators. Agricultural loan demand rose further with high input costs. The funds available for loans held above year-ago levels. Farm income expectations and capital spending plans moderated with crop prices dropping below summer highs. Farmland values held steady.
Wages and Prices
Since the last survey period, price pressures have lessened and wage pressures eased. Fewer manufacturers reported price increases for both raw materials and finished goods and expectations for future price increases waned. Still, most plant managers reported that input prices remained well above year-ago levels. Retail prices rose only slightly, but were expected to increase further in the coming months. Agricultural producers expanded their operating loans to pre-pay higher input prices. Restaurants planned to raise menu prices in response to higher food costs. Fewer firms expected to hire workers and most did not anticipate raising wages in light of weaker labor markets. The labor market remained tight, however, for skilled jobs in manufacturing and energy firms, as well as minimum-wage positions in the leisure and hospitality industry.