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The Tenth District economy improved slightly in late April and May, but signs of softness were still present. Retail sales edged up, residential real estate activity strengthened further, and energy activity continued to expand. In addition, the pace of layoff announcements slowed. Manufacturing activity was still sluggish, however, and commercial real estate markets remained soft. In the farm economy, recent rains eased drought conditions in some parts of the District, but further precipitation was needed. Wage and price pressures were largely subdued.
Retail sales in the District increased slightly in late April and May after slowing during the Iraq war. Despite the improvement, sales at most stores remained lower than a year ago. Among product categories, sales of home furnishings were strongest, while apparel sales were relatively weak. Most managers were optimistic that retail sales would continue to improve during the summer. Managers were generally satisfied with inventory levels, and most planned to make only small adjustments to stock levels in coming months. Motor vehicle sales strengthened somewhat in late April and May but remained lower than year-ago levels. Demand continued to be solid for new light trucks and SUVs. Dealers also reported that sales of late-model used cars had picked up. Most dealers remain optimistic that sales will continue to increase through the summer months. In the tourism industry, the Rocky Mountain ski resorts experienced a weaker-than-expected end to the ski season following strong activity earlier in the year. However, owners of family destinations in the District were optimistic about summer activity, as early bookings were solid.
District manufacturing activity was sluggish in late April and May, but optimism about future activity remained relatively high. The end of the war in Iraq appeared to have little effect on factory activity. Production and new orders remained close to year-ago levels, and most firms continued to operate at medium levels of capacity utilization. On a positive note, employment levels appeared to stabilize somewhat in May, and expectations for future exports increased notably during the month. Expectations for future production and sales remained high, but plans for future hiring and capital spending were still rather muted. Over the remainder of the year, a slightly higher percentage of firms plan to increase capital spending than plan to decrease such spending, with most firms citing expected growth in sales as the primary influence on their investment decisions.
Real Estate and Construction
Residential real estate activity in the District strengthened further in late April and May, while commercial real estate activity remained soft but showed signs of stabilizing. Single-family housing starts continued to increase in most District cities, especially for lower-priced homes and townhouses. Building activity is expected to remain solid through the summer. Builders in Kansas City and Oklahoma City expect an added boost in coming months as homeowners rebuild following destructive tornados in early May. Home sales increased in much of the District in late April and May, although inventories of unsold homes were higher than a year ago in many cities and at record levels in Denver. Most real estate agents expect home sales to remain steady in coming months. Mortgage demand remained strong throughout the District. Lenders expect the robust activity to continue, although they anticipate a shift in demand from refinancings to home purchases later in the summer. Although commercial real estate activity remained weak across the District in late April and May, it showed signs of stabilizing in most markets. Office vacancy rates and rental prices for office space were virtually unchanged from the previous survey. Most commercial real estate agents expect sales of office space to increase slightly this summer, and absorption rates are expected to edge up in some cities as well.
Bankers report that loans and deposits both edged up since the last survey, leaving loan-deposit ratios unchanged. Demand for home mortgage loans continued to grow, outweighing small declines in demand for consumer loans and business loans. Some bankers attributed the sluggish demand for business loans to a wait-and-see attitude on the part of businesses. On the deposit side, demand deposits, NOW accounts, and money market deposit accounts all edged up. All respondent banks left their prime lending rates unchanged, but a few lowered their consumer lending rates. Lending standards were unchanged.
District energy activity continued to expand in late April and May. The count of active oil and gas drilling rigs in the region rose nearly 10 percent since the previous survey, with most of the increase occurring in Wyoming. The opening of a major gas pipeline in early May relieved a capacity constraint out of southwestern Wyoming, leading to a 33 percent rise in Rocky Mountain natural gas prices and a 40 percent increase in Wyoming drilling activity by Memorial Day. Contacts expect energy prices to remain high through the rest of the year, helping sustain drilling activity.
In the farm economy, recent rains eased drought conditions in some parts of the District, but additional precipitation is needed for further development of crops and pastures. The moisture helped the winter wheat crop, which was reported in good condition throughout much of the District, but delayed planting of corn and soybeans in some areas. The moisture also improved pasture conditions, prompting some cattle producers to consider retaining more of their herds than they had anticipated. District bankers indicated that they had extended credit to the typical number of farm borrowers, although some bankers increased their use of government guarantees on farm loans. New-equipment sales remained sluggish, but land sales edged higher.
Wages and Prices
Wage and price pressures remained generally muted across the District. Labor markets were still very slack in late April and May, although the pace of layoff announcements continued to ease. Managers reported few problems finding workers, except for some highly skilled positions in manufacturing and health care. There were also reports that high school and college students were having difficulty finding summer jobs because of competition from laid-off adult workers. Wage pressures remained subdued, and some employers reported slower growth in health-care benefit costs. Despite the lack of wage pressures, some managers reported that their average wages had risen over the past year, as lower-paid junior workers were laid off. Retail prices were virtually unchanged from the previous survey and are expected to remain flat through the summer. Manufacturers continued to report rising prices for some petroleum-based inputs, but prices for most other materials were relatively stable. While manufacturers reported another small decline in finished goods prices, they expect output prices to rebound somewhat in coming months. As in previous surveys, prices for construction materials were flat and are expected to remain largely unchanged through the summer.