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The district economy remained healthy in June and early July, but growth continued to slow from the brisk rate of last year. The recent boom in construction appeared to subside somewhat, and manufacturing activity slowed slightly from a strong performance in May. Retail activity was flat, although sales were still comfortably higher than a year ago. District farmers faced cash flow concerns as grain prices continued to fall. Labor markets in most of the district remained very tight, with wage pressures present but largely unchanged from previous surveys. Retail prices continued to edge up, as did prices for construction materials. Prices for some manufacturing materials fell.
Retailers in the district report flat sales in June and early July, at virtually the same high levels registered earlier in the year. Casual clothing sold well, helping to keep overall sales comfortably above year-ago levels. Inventories continued to expand and are expected to rise further, as stores prepare for the back-to-school season. Managers remain optimistic about future sales, especially in urban areas. Automobile sales rebounded after showing some weakness in May, although purchases of passenger cars continued to lag behind purchases of other vehicle types. Dealers' inventory concerns eased somewhat as stronger sales were matched by a steady supply. Vehicle sales in the near future are expected to remain solid.
Tenth District factory activity slowed slightly but remained much improved compared with the beginning of the year. Plants report a modest decline in capacity utilization in June and early July following consistent increases for several months. Most manufacturing materials remained generally available, with slight increases in lead times for some inputs, such as steel and plastic materials. Purchasing managers continued to express concerns about future material availability. More plants were reducing inventories than in previous surveys, and most plan to continue trimming stock levels.
Builders report slower construction activity in the district, although the number of housing starts remained higher than a year ago. Expectations for future building activity also weakened. Availability problems continued for many construction materials, including sheetrock, insulation, lumber, and brick. Builders expect that availability problems will persist for several months. Home sales slowed somewhat but remain around year-ago levels, with inventories of unsold homes staying at moderate levels. Mortgage lenders report a significant decline in refinancing activity in June and July. They expect a gradual decline in mortgage demand in coming months, due largely to interest rate uncertainty.
Bankers report that loans increased and deposits held steady in July, boosting loan-deposit ratios. Loan demand grew most for commercial and industrial loans and residential construction loans. Stronger loan demand was also reported for consumer loans, home equity loans, and commercial real estate loans. On the deposit side, increases in demand deposits and money market deposit accounts were offset by a decrease in large time deposits. Almost all respondent banks increased their prime lending rate last month, and some banks also raised their consumer lending rates. While most banks expect to maintain their prime rate in the near term, a few banks expect to raise their consumer lending rates. Lending standards were generally unchanged.
District energy activity leveled off in July, as producers remain cautious about oil prices. After posting modest gains for two months in a row, the rig count was virtually unchanged from June to July, at almost 30 percent below year-ago levels. Oil prices stalled in May and June, but rose 12 percent July, pointing to a likely uptick in rig activity in coming months.
The district's winter wheat harvest is almost complete, with production down about 10 percent from a year ago. Heavy rains in southern parts of the district hurt yields and the quality of the crop, but other parts of the district fared somewhat better. The district corn and soybean crops are generally in good condition with above-average yields expected. If realized, the high yields combined with large spring plantings will result in a near-record corn and soybean harvest this fall. Large supplies of wheat, corn, and soybeans have pushed down crop prices significantly, creating cash flow concerns for many district producers. To date, district bankers do not report a significant increase in voluntary farm or equipment sales as a result of low crop prices; nor has there been a sharp drop in rural business conditions. However, most district bankers expect an increase in farm sales next year, which could depress business and consumer confidence in the rural economy.
Wages and Prices
Labor markets remained very tight in most of the district, with continued, but not increasing, evidence of wage pressures. Shortages of construction and retail workers were similar to the recent past, while manufacturers experienced increased difficulties. All types of construction workers were in short supply, with reports of some builders recruiting internationally to obtain skilled tradesmen. Retailers also faced shortages across the board. Manufacturers experienced difficulties finding workers in general, but welders and machinists were particularly hard to find. Overall wage pressures were similar to the previous survey, but respondents continued to note sizable pay increases for positions such as skilled construction tradesmen and IT workers, particularly in Denver, Kansas City, and Omaha. In addition, the use of signing bonuses appears to have increased in the construction sector. Retail prices edged up again in June and are likely to continue edging upward in the near future. Manufacturers report that prices for several materials, including steel and grain, fell in June but are expected to level off soon. Prices of construction materials continued to rise as building activity remained strong, and further increases are expected in coming months.