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The Tenth District economy remained relatively weak in December and early January. Manufacturing activity declined further, construction and real estate markets eased, and energy activity continued to fall. Holiday retail sales, however, were slightly higher than a year ago in much of the district, and tourism activity in Colorado was especially strong over the holidays. In the farm economy, concerns spread about dry conditions throughout the district. District labor market conditions were similar to the previous survey, with most firms having few difficulties hiring workers. Wage pressures were virtually nonexistent, and there were some reports of wage and benefit cuts. Retail prices fell slightly with heavy holiday discounting, while prices for most manufacturing and construction materials were unchanged.
Holiday retail sales held up better than many retailers had feared, with most stores reporting slight increases from a year ago. Large discount stores continued to enjoy stronger sales than luxury retailers, and home furnishing items sold particularly well. According to some retailers, the solid holiday sales were due to heavy discounting and are unlikely to continue. Other stores predict steady sales activity through the spring. Most managers were satisfied with inventory levels after the holidays. District sources reported that traffic at ski resorts in Colorado was especially strong over the holiday season, as snow levels increased in late December. Motor vehicle sales in the district fell slightly from a very strong November, but were still well above year-ago levels due to attractive financing packages. Most of these incentives ended with the new year, however, and dealers expect overall vehicle sales to weaken considerably in coming months. The strong sales of new cars in recent months have produced an abundance of late-model used vehicles on dealer lots.
District factory activity weakened further in December. A higher percentage of firms reported year-over-year declines in production, shipments, and new orders than in the previous survey. A large number of manufacturers continued to shed workers from their payrolls, and capital spending remained well below year-ago levels. On a positive note, however, a higher percentage of plant managers expected future increases in production than in previous surveys. Most manufacturers continued to trim inventories, but many expect inventory levels to stabilize in coming months. No significant shortages of materials were reported, and supplier delivery times remained largely unchanged.
Real Estate and Construction
Residential construction activity was down slightly in December, and commercial real estate markets remained weak. Home sales and housing starts were especially sluggish in Colorado, which has been hit hard by recent layoffs. Residential sales and starts in the rest of the district were mixed, with little activity occurring over the holidays. Sales remained weaker for high-end homes than for other types of homes. Commercial realtors continued to report weakness in district office markets. Construction starts have slowed significantly, coming to a virtual standstill in some areas. However, completed projects continue to come online, pushing vacancy rates up further. The surplus of office space was cited as being particularly problematic in Denver and Kansas City. In Denver, rent and tenant improvement concessions from landlords were said to be masking the full extent of rent declines in the local commercial market.
Bankers report that loans decreased 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 for home mortgages also eased, with a number of bankers reporting a dropoff in refinancing activity. On the deposit side, demand deposits, NOW accounts, and money market deposit accounts all increased. All respondent banks reduced their prime lending rates, but most banks left their consumer lending rates unchanged. Lending standards were generally unchanged.
Energy activity in the district continued to ease in December and early January. The region's count of active oil and gas drilling rigs reached a two-year low, as continued warm weather and the slowdown in the economy constrained energy prices. However, district sources expect prices and activity to ramp back up in 2002. Several district firms also reported expansion of coal-bed methane exploration activity into previously untapped portions of the district.
Concerns about dry weather persisted across agricultural areas of the district. There was little or no snow cover to protect the winter wheat crop from extreme cold temperatures, and lack of moisture has caused some signs of deterioration in the crop. Dry weather has also limited pasture growth, causing most ranchers to be reluctant to expand their cattle herds. District bankers report that some weakness in farm loan portfolios may surface during year-end credit reviews but that government payments to crop producers and strong livestock profits in the first half of 2001 will likely provide stability.
Wages and Prices
District labor market conditions remained similar to the previous survey, with firms continuing to report few difficulties hiring workers. The pace of layoffs rose slightly in December after slowing in November, but there were also reports that some companies that had put off adding workers after September 11 were beginning to hire again. Shortages also persisted for several specific occupations, including nurses, pharmacists, and some skilled building trades. There was virtually no evidence of wage pressures outside these occupations. In fact, several firms have cut wages and others have offered smaller merit pay increases than in the past. Some employers have also increased employees' share of health care costs. Most firms reported relatively few complaints from workers about these changes. Retail prices fell slightly due to heavy holiday discounting, but are expected to return to previous levels in the near future. Prices increased for some manufacturing materials, while prices for many petroleum-related materials eased. Some plant managers expect increases in material prices in coming months. Prices for construction materials remained largely unchanged.