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The Tenth District economy expanded modestly in September and early October. Retail sales and manufacturing activity rose slightly, and residential construction edged higher following recent declines. Energy activity also continued to increase, as oil and gas prices remained high. In contrast to these sectors, commercial construction remained flat. In the farm economy, record corn and soybean harvests kept crop prices low. District labor markets remained tight, with wage pressures up slightly from the recent past. Prices continued to rise for some manufacturing materials, but builders reported a decline in lumber prices. Retail prices were generally stable.
Retailers in the district reported a modest rise in activity from August to September and early October. Most stores also reported a slight increase in sales on a year-over-year basis. Clothing sold well, while sales of home furnishings and most other items were generally weak. Store inventories edged up but most managers were satisfied with current stock levels, as expectations of future retail activity remained strong. Motor vehicle sales were up slightly in September and early October. Dealers were largely successful at managing inventories during the model year changeover, with few reports of difficulties selling 2000 models or obtaining new vehicles. Expectations remain soft for vehicle sales in coming months.
District factory activity edged up in September and early October, with slightly more firms reporting high levels of capacity utilization than in the summer. Exceptions included several producers of heavy machinery who have seen demand weakened by increases in interest rates and fuel costs. Manufacturing materials were generally available, with lead times largely unchanged. Managers do not foresee difficulties in obtaining materials in the near future. Inventories were down slightly from the previous survey, but most managers were eager to trim stock levels further.
Real Estate and Construction
Residential construction activity edged higher in September and early October following several months of decline, while commercial building was largely unchanged. Despite the small increase in housing starts, homebuilding remained well below year-ago levels in most areas of the district. Sales of new and existing homes were also flat to down in most areas of the district when compared to a year ago. Most builders expect steady residential construction activity for the rest of the year. Mortgage demand remained weak, with virtually no refinancing activity taking place in September. Most lenders do not expect mortgage demand to change in coming months. Commercial construction activity was mixed across the district, but was flat overall compared with both a month ago and a year ago. Absorption of office space increased slightly and office vacancies declined slightly during the past month. Absorption and vacancy rates both appeared to be about the same as a year ago. A few commercial realtors expressed concern that declines in technology stocks could adversely affect the office market in the future.
Bankers reported that loans fell and deposits rose over the past month, reducing loan-deposit ratios slightly. Demand edged down for consumer loans, home mortgages, and residential construction loans, outweighing a small increase in home equity loans. On the deposit side, demand deposits, NOW accounts, and money market deposit accounts all increased, while large CDs declined. Almost all respondent banks held their prime lending rates and consumer lending rates steady and do not expect to change those rates in the near term. Lending standards were generally unchanged.
Energy activity in the district increased in September and early October, as tight supplies kept oil and natural gas prices high. The count of active oil and gas rigs in the district increased for the eighth consecutive month despite reported difficulties in finding qualified workers. Most of the increase in drilling has been for natural gas. While some new oil exploration is occurring, district producers reported that they are primarily reworking old wells.
The district's fall harvest is almost complete. Record corn and soybean crops are expected, holding down crop prices despite dry weather that hurt crop yields in some areas. The dry weather has also slowed progress in planting the district's winter wheat crop. Low grain prices have trimmed feed costs for district livestock producers, but the high price of young feeder cattle has cut into feedlot profits. District bankers reported that farm loan portfolios are generally in good condition, mainly due to big government payments to grain producers.
Wages and Prices
Labor markets in the Tenth District remained tight in September and early October, with wage pressures up slightly from recent surveys. The greatest shortages of workers appear to be in information technology, manufacturing, oil and gas extraction, trucking, and entry-level retail. The shortage of construction workers reported in previous surveys appears to have eased somewhat due to the slowing in building activity this year. A slightly higher proportion of business contacts reported an increase in wage pressures. There also appeared to be an increase in the use of flexible work schedules to attract and retain workers. Retail prices were stable in September and early October but are expected to edge up in the near future as transportation surcharges pass through. Upward price pressures continued for some manufacturing materials, including steel and plastics, but are expected to ease in coming months. Most manufacturers continued to report that they were unable to pass these cost increases through to customers. Builders reported a decline in lumber prices in September but prices for most other construction materials were unchanged and are expected to remain steady.