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The Tenth District economy was very sluggish in December. Holiday retail sales were little changed from a year ago, energy activity failed to rise despite higher prices, and commercial real estate activity remained soft. Moreover, motor vehicle sales eased again and manufacturing activity weakened after showing signs of stabilizing in the fall. On the positive side, housing activity maintained a solid pace, and tourism was very strong at ski resorts in the Rocky Mountains. In the farm economy, many ranchers and farmers continued to suffer from drought conditions. Wage and price pressures remained largely subdued across the district, although some materials prices rose slightly.
Overall, holiday retail sales in the district were flat compared with the previous year. Discount stores and department stores that ran extensive promotions reported the best performance, while sales at most higher-end stores and other retailers were somewhat softer than a year ago. Sales of toys and electronics were brisk at most stores, but sales of big-ticket home items and most types of apparel were weaker than expected. In spite of the less-than-stellar holiday season, store managers generally maintained optimism about future sales. Due to cautious expansion of inventories in advance of the holidays, nearly all managers were also satisfied with current stock levels and planned few adjustments in coming months. Motor vehicle sales shrank somewhat further in December and were below year-ago levels across the district. Still, most auto dealers considered 2002 a fairly solid year. Dealers expect little improvement in sales in coming months, however, and many plan to trim inventories. In the tourism industry, plentiful snow helped Rocky Mountain ski resort operators enjoy one of their best holiday seasons ever, resulting in very strong revenues for local shops, restaurants, and other establishments.
District manufacturing activity weakened somewhat in December after showing signs of stabilizing in late fall. Production, new orders, and capital spending all fell back below year-ago levels after firming in October and November. The reported declines in activity were also widespread across manufacturing industries. One positive note came from aircraft manufacturers in the district, who reported that new defense orders were helping to offset some of the slowdown in that industry. Overall, plant managers were slightly less optimistic about future factory activity than in previous surveys, but a majority continued to anticipate some increase in production and shipments in the spring. Capital spending plans remained rather modest, however, with most firms expecting little change from 2002 expenditure levels.
Real Estate and Construction
Residential real estate activity in the district remained solid in December, while commercial real estate markets were still weak. Single-family housing starts continued at high levels except in some areas of Colorado, with rapid construction of entry-level homes offsetting some slowing in higher-end building. Construction of multifamily units slowed somewhat from previous surveys, due largely to the continued strong demand for entry-level houses. Most builders expect home construction to remain solid through the spring. In contrast to housing starts, reports on home sales were mixed. Realtors in several cities reported that home sales eased in December, resulting in some buildup in inventories of unsold homes. Realtors in Denver, Colorado Springs, and Tulsa also noted some small declines in average selling prices from previous months. However, realtors in some other cities noted a pickup in home sales during the month and were optimistic about the future. Mortgage demand remained strong in December, but lenders expect some slowing in coming months as refinancing activity wears down. Several lenders also expressed concern about the declining credit quality of borrowers. Commercial real estate activity was still weak in most District cities. Construction, absorption, and prices of office space were generally flat or lower compared with the previous survey. Vacancy rates edged up further in Denver and showed no improvement in other cities. Most commercial realtors expect continued weakness in District office markets for the foreseeable future.
Bankers report that loans edged down and deposits held steady since the last survey, reducing loan to deposit ratios slightly. Demand increased slightly for home mortgage loans and was unchanged for home equity loans. However, demand for other loan categories edged down, with most bankers attributing the declines to the sluggish economy. On the deposit side, a small increase in demand deposits was offset by slight declines in large CDs and small time deposits. All respondent banks left their prime lending rates unchanged since the last survey, and most banks also held their consumer lending rates steady. A few respondents tightened their lending standards, citing concerns about the economy.
District energy activity was flat in December, as recent increases in energy prices have yet to spur more drilling. The count of active oil and gas drilling rigs in the region was unchanged from November and down slightly from the summer months. Both oil and natural gas prices reached two-year highs in late December, but many District producers remain cautious about expanding activity due to uncertainty about future prices. Some natural gas producers also reported difficulty securing financing for exploration. In addition, limited pipeline capacity from Rocky Mountain gas fields continues to constrain prices and activity to some degree in that region.
In the District's agricultural sector, much of the winter wheat area remained extremely dry. Some areas received beneficial snowfall, but subsoil moisture was still well below normal. Despite the dry conditions, forage supplies appeared to be adequate for the winter months. Feedstuffs from abandoned crop fields and emergency grazing of Conservation Reserve Program acres extended feed supplies and allowed cattle ranchers to maintain herd numbers. However, if drought conditions persist and erode feed supplies, some ranchers could face additional herd liquidations. Given preliminary reviews of their farm loan portfolios, District bankers do not expect new repayment problems to surface. Some bankers reported a decline in farm loan demand for real estate and machinery.
Wages and Prices
Wage and price pressures remained generally subdued across the District in December, although some materials prices rose slightly. Labor markets were still very slack, with worker shortages reported only in the health-care field and for some building trades. The pace of layoff announcements eased somewhat from the previous survey but was higher than in the early fall. There was little evidence of wage pressures, with most firms offering only cost-of-living increases for 2003. Retail prices fell slightly due to holiday discounting but are expected to hold steady through the spring. Some builders again reported increases in plywood prices, and several other building materials prices are expected to rise slightly in coming months as well. Manufacturers reported that steel price increases have subsided recently due to weakened demand. Some other manufacturing material prices have risen lately, however, and are expected to increase further. At the same time, manufacturers' finished goods prices continue to fall, putting more pressure on their profits.