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The Tenth District economy continued to improve in late July and early August, and business contacts were generally upbeat about future activity. The manufacturing sector added to gains made earlier in the summer, retail sales again rose slightly, and housing and energy markets remained strong. On the negative side, commercial real estate activity weakened slightly after showing signs of stabilizing in recent months. In the farm economy, hot, dry weather harmed crop and pasture conditions. Wage and price increases remained minimal, while employee benefit costs continued to rise.
Retail sales in the district increased slightly in late July and early August and were above year-ago levels at most stores. Retailers attributed part of the improvement to consumers spending federal tax rebate checks. Among product categories, sales of men's and children's apparel, particularly back-to-school clothes, were strongest. Some softness was evident, however, in sales at high-end stores and in sales of jewelry. Most retailers expect sales to increase further through the fall. Store managers were generally satisfied with inventory levels and plan only seasonal changes in coming months. Sales of new motor vehicles in the district increased slightly in late July and early August, and, in a change from the previous survey, sales of used vehicles also rose. Auto sales, however, were still somewhat lower in most areas than last year's high levels. The improvement in vehicle sales in recent months has allowed most dealers to reduce or eliminate excess inventories heading into the new model year. Nearly all dealers remain optimistic about future sales, due in part to the anticipated continuation of manufacturer incentives. Travel and tourism activity was mixed across the district. Airport traffic increased from earlier in the summer in several cities but was down somewhat in others. Rafting activity in Colorado was reported to be solid, and hotel occupancy rates in Denver finally rose back above year-ago levels. On the other hand, some recreation businesses in and around Yellowstone reported fewer visitors in early August due to wildfires.
District manufacturing activity expanded further in late July and early August, and most managers were optimistic about future output. Plants reported slightly higher levels of capacity utilization than in the previous survey, and the volume of new orders rose considerably. Producers of pharmaceutical goods reported the strongest activity, while some makers of fabricated metal products continued to struggle. Several manufacturers reported that recent increases in demand have spurred longer workweeks and some new hiring. However, factory production remained slightly below year-ago levels, and capital expenditures were still sluggish at most firms. In addition, several firms indicated concern about the continuing impact of high energy and insurance costs on their profit margins.
Real Estate and Construction
Residential real estate activity in the district remained strong in late July and early August, while commercial real estate activity weakened slightly. Single-family housing starts maintained a rapid pace in most district cities, with starts of entry-level homes particularly robust. Builders reported that demand for virtually all types of homes was boosted somewhat in recent weeks by home-buyers rushing to sign contracts for new houses before mortgage rates rose further. Builders generally expect strong single-family construction to continue through the fall. Home sales also remained brisk across the district in late July and early August, and inventories of unsold homes showed signs of stabilizing in most markets after rising earlier in the year. Like builders, realtors in some cities reported increased buyer traffic in July after mortgage rates began to rise. Most realtors expect sales to hold steady in coming months. The strong residential real estate activity boosted demand for home purchase mortgages, partly offsetting a steep decline in refinancings. Mortgage lenders generally expect the shift from refinancings to home purchase loans to continue, with overall loan demand moving lower through the fall. Most commercial real estate markets in the district weakened slightly in late July and early August after showing signs of stabilizing in previous surveys. Sales and absorption of office space eased in most cities, while vacancy rates edged higher. Looking forward, realtors expect commercial real estate activity to remain sluggish for at least the remainder of the year, but they generally do not anticipate further deterioration in conditions.
Bankers report that loans increased and deposits held steady since the last survey, boosting loan-deposit ratios somewhat. Demand for home purchase mortgages continued to rise, and demand for commercial real estate loans increased as well. In contrast, demand for business loans and consumer loans was largely unchanged. On the deposit side, slight increases in demand deposits and NOW accounts were offset by a decline in large CDs. Most respondent banks held their prime lending rates and consumer lending rates steady, and lending standards were unchanged.
District energy activity continued at a solid pace in late July and early August. The count of active oil and gas drilling rigs in the region edged higher. Moreover, district bankers reported strong loan demand for gas field equipment and development, suggesting that natural gas production will continue to increase. After easing slightly in late June and July, natural gas prices began to rise with higher temperatures in August and are expected to remain elevated in coming months. Some contacts fear a spike in prices this winter if hot summer temperatures prevent gas supplies from being adequately replenished by November, or if winter temperatures turn out to be colder than normal.
Hot, dry weather had a marked adverse impact on the district's farm economy in late July and early August. The condition of corn and soybean crops deteriorated, and planting prospects for winter wheat were poor. Pasture conditions throughout the district also showed signs of deterioration. While herd liquidations did not increase, most livestock producers were not expanding their herds. Strong cattle prices will boost profits for livestock producers this year, but district bankers do not expect borrowers to recover all of the losses incurred over the last few years. District farmland values continued to be boosted by nonfarm demand in scenic areas and for recreational use.
Wages and Prices
Wages and prices remained relatively stable in late July and early August. Labor markets were still quite slack around the district, and managers reported worker shortages in only a few occupations, including pharmacists and security guards. The pace of layoff announcements picked up slightly but remained much slower than earlier in the year. Firms generally do not expect further reductions in their workforces, but the vast majority of firms also plan very little hiring until 2004, due in part to productivity enhancements. Wage pressures were virtually nonexistent, with nearly all firms offering only cost-of-living increases or less. Benefit costs continued to rise, however, and most firms do not expect health insurance inflation to subside anytime soon. Overall, pricing trends have remained largely unchanged from the previous survey. Retail prices remained flat, and building contractors and manufacturers reported little ability to raise their prices in the face of rising fuel and energy costs. Retailers expect little change in prices in coming months. However, manufacturers anticipate some increases in steel prices heading forward, and builders expect slight increases in some construction material prices, including gypsum wallboard.