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The Tenth District economy maintained an upward trend in June and early July, although there were still some signs of weakness. Residential real estate activity rose in most of the district, and manufacturing activity continued to improve. In addition, retail sales remained steady, and energy activity held previous gains. On the negative side, vehicle sales were weak prior to the reintroduction of incentives, and commercial real estate markets continued to soften. In the farm economy, drought conditions damaged pastures and spring crops in western parts of the district. Wage and retail price pressures remained largely subdued, although prices for some manufacturing and construction materials increased.
Most retailers in the district continued to report steady sales in June and early July. Sales appeared to be strongest at higher-end stores. Among merchandise categories, home furnishings performed best, while appliances and sporting goods showed some weakness. Apparel sales were mixed. Stores appear to have finally eliminated excess inventories and are now beginning to re-stock. Nearly all managers were optimistic about sales in coming months, particularly for the back-to-school season. Motor vehicle sales were generally weak in June, with dealers aggressively trimming inventories. Sales began to pick up in early July but only after the reintroduction of attractive financing incentives. Dealers remain very concerned about future sales and some have increased their advertising expenditures considerably in order to reduce inventories before the special financing ends. Tourism activity in the district appears to have largely returned to pre-recession levels outside of Colorado. In Colorado, occupancy rates at hotels and resorts were improving until the June wildfires disrupted the rebound.
District factory activity showed further signs of recovery in June and early July, though firms were not as upbeat as a few months ago. Production moved almost even with year-ago levels, and fewer firms than in past surveys reported declines in employment from a year ago. Capacity utilization also remained higher than earlier in the year. On the other hand, the volume of new orders weakened somewhat, and expectations for future production were not as high as in the spring. Inventories declined in June but are expected to hold steady in coming months. Supplier delivery times continued to edge up.
Real Estate and Construction
Residential real estate activity improved in June and early July, but commercial real estate markets continued to weaken. Single-family construction rose in most areas and was considerably higher than a year ago in some places. Starts of entry-level houses were particularly strong. Builders expect construction activity to remain solid in coming months and are not expecting any problems in obtaining materials. Home sales were steady across the district, with strong sales of lower-priced homes continuing to offset somewhat weaker sales of higher-priced homes. Realtors expect these sales patterns to continue. Mortgage lenders reported a slight increase in demand for home loans, with both home purchases and refinancings edging up from the previous survey. Lenders indicated that the majority of borrowers who refinanced were seeking to reduce their monthly payments rather than cash out. Mortgage demand is expected to remain steady through the fall. Commercial realtors reported further weakening in district office markets in June and early July. Vacancy rates continued to edge up across the region, while construction, sales, and prices of office space continued to decline. Most realtors expect further softening in office markets in coming months.
Bankers report that loans fell and deposits edged up since the last survey, reducing loan-deposit ratios. Demand decreased for all major loan categories except home equity loans, which held steady. Some bankers attributed the decline in loan demand to the uncertain economic outlook and increased caution on the part of borrowers. On the deposit side, NOW accounts remained unchanged but all other categories rose. All respondent banks left their prime lending rates unchanged, and most banks also held their consumer lending rates steady. A few banks tightened their lending standards.
Energy activity in the district remained strong. The count of active oil and gas drilling rigs in the region held steady in June and early July after rising considerably in May. Natural gas producers in Wyoming, however, have experienced some downward pressure on earnings in the past few months. While natural gas prices in most of the country have remained flat since April, prices in Wyoming have fallen sharply. District sources attribute the price decline in the state to the combination of increased local production and a shortage of pipeline capacity to transport supplies to national markets.
Drought conditions persisted in much of the district in June and early July. As a result, the recently harvested wheat crop was below average and spring-planted crops were stressed. Pastures have been extremely dry, forcing cattle ranchers to seek other forage supplies and sell some of their breeding stock and young calves. However, in the easternmost areas of the district, spring planted crops and pasture conditions have been favorable. District bankers expect lower farm incomes this year due to drought-related crop losses and lower livestock prices. Bankers indicate they will continue to watch farm loan portfolios closely, as farm financial conditions will depend largely on government payments and crop insurance.
Wages and Prices
Wage and price pressures remained generally subdued in June and early July, although some materials prices rose. District labor markets were quite slack, and layoff announcements increased slightly from the previous survey. However, employers continued to have difficulty hiring nurses, skilled construction workers, and certain types of IT workers. Some retailers also reported they were beginning to have problems finding experienced salespeople. Wage pressures were generally nonexistent outside of these fields, but employer benefit costs continued to increase, due primarily to rising health care premiums. Many firms reported they were planning to pass premium increases on to their employees or were exploring other ways to limit their health insurance contributions. Retail prices remained basically flat and are expected to stay unchanged in coming months. Builders reported they were paying slightly higher prices for materials, particularly for lumber. They expect these increases to taper off in the near future, however. Some manufacturers reported further rises in steel prices, but prices for most other materials were unchanged. Many managers expect slightly higher material prices over the next few months.