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The Tenth District economy continued to expand in late April and May. Retail sales rose moderately, factory activity increased further, and labor markets showed additional improvement. Also, housing and energy activity continued to rise from high levels, and agricultural conditions were generally solid. Commercial real estate, on the other hand, remained relatively weak. Wage pressures were still muted and retail price increases were modest, but many manufacturers were raising their output prices.
Consumer spending in the district increased moderately in late April and May. Retailers generally reported steady sales gains since the previous survey, with sales solidly above year-ago levels at most stores. Among product categories, sales were strongest for women's and children's apparel. Inventory levels were generally reported as satisfactory, but some stores were planning to expand stock levels heading forward. Nearly all managers anticipate solid increases in sales in coming months. Motor vehicle sales in the district were flat to slightly higher in late April and May compared with previous months, and the modest improvement pushed sales above year-ago levels in most places. Dealers reported truck and SUV sales remained strong despite increases in gasoline prices, although some did note a recent shift in demand from large SUVs to smaller SUVs. Most dealers were very optimistic about future sales, although a few dealers expressed concern about increasing rejections of loan applications due to applicants' high debt burdens. Travel and tourism activity improved in most areas in late April and May. Airport traffic was up considerably throughout the district, due in part to a rise in business travel, and some airports anticipate record passenger traffic this summer. Hotel occupancy rates were also up modestly in many areas, including some resort areas which had suffered from poor snowfall in late winter. Tourism businesses reported little impact from rising gasoline prices and solid advance summer bookings in most areas.
District manufacturing activity continued to expand in late April and May. Manufacturers reported further increases in production and shipments, and a sizable number of firms said they had added workers since the previous survey. Most plant managers also said recent increases in activity had pushed their capacity utilization rates up to or beyond pre-recession levels. Capital expenditures were up sharply at many firms and were at or above year-ago levels at nearly all firms. A growing number of firms were also expanding their inventories of raw materials. Many firms, however, were having difficulties obtaining steel and selected other materials, and supplier delivery times were up considerably from earlier in the year, particularly for materials transported by train. Heading forward, firms remain quite optimistic about future factory activity and plan continued increases in employment and capital spending despite expectations for some leveling off in the rate of increase of new orders.
Real Estate and Construction
Residential real estate activity continued to increase in late April and May, while commercial real estate remained generally weak. Single-family housing starts improved further in most cities and were above year-ago levels throughout the district. According to builders, demand for less expensive homes was stronger than for higher-end homes since the previous survey. Builders generally anticipate continued steady improvement in home construction through the summer, although some concerns remained about the impacts of rising materials prices and mortgage rates. Residential realtors reported solid increases in home sales in nearly all district cities, with sales much higher than a year earlier in many areas. Several realtors noted that the recent rise in mortgage rates had encouraged some reticent buyers to close on home purchases. Looking ahead, realtors expect home sales to level off slightly and home prices to continue to post modest gains. Mortgage lenders generally reported little change in mortgage demand compared with the previous survey. However, demand was down moderately from year-ago levels in most areas due to lower refinancings. Lenders expect mortgage demand to remain steady through the summer with a continued shift from refinancings towards home purchase loans. Commercial real estate activity was still generally weak. Vacancy rates were largely unchanged compared with the previous survey, and a considerable amount of excess space persists in most cities. On the positive side, vacancies are expected to edge down and prices for office space are expected to increase slightly over the rest of the year.
Bankers report that loans increased and deposits held steady since the last survey, raising loan-deposit ratios somewhat. Demand edged up for all loan categories except consumer loans, which were unchanged from the previous survey. On the deposit side, all types of accounts held steady. Almost all respondent banks left their prime lending rates unchanged, but a few banks raised their consumer lending rates slightly. Lending standards were generally unchanged.
District energy activity continued to rise modestly in late April and May. The count of active oil and gas drilling rigs in the region was up slightly from the previous survey and was still well above year-ago levels. Many firms noted that expansion was being limited by rising prices of equipment and materials, shortages of labor, and a lack of permits in some areas. Even so, oil and gas contacts generally foresee a further increase in drilling heading forward, given their expectations that energy prices will remain high.
Agricultural conditions in the district generally remained solid. Strong grain
and livestock prices increased farm revenues and contributed to higher loan
repayment rates. Some crop producers reportedly compensated for high energy
costs by converting irrigation systems from natural gas to other energy sources
and by shifting to no-till production. In the livestock market, herd expansion
has been constrained by low cattle supplies and drought conditions. The drought
has also trimmed the winter wheat crop in portions of the district, although
recent heavy rain improved conditions somewhat.
Wages and Prices
Wage pressures remained muted and retail prices were up only modestly in late
April and May, but manufacturers were increasingly raising their output prices.
Labor markets continued to improve, with more hiring announcements than layoff
announcements by district firms since the previous survey. Also, some labor
shortages were reported in the manufacturing, trucking, energy, and health care
industries. A few manufacturing and energy contacts noted particular difficulties
adding qualified entry-level employees. Most firms, however, continued to have
few problems hiring workers and were not finding it necessary to raise wages
more than normal. Retailers generally reported flat selling prices, although
some stores raised prices modestly on items made from steel, wood, or petroleum-based
products. Retailers generally expect prices to be flat to slightly higher heading
forward. Many trucking and rail firms in the district have increased rates in
recent months due to rising fuel costs and increased demand. Builders continued
to report rising prices for lumber, sheetrock, and steel products, and said
that prices for cement have also begun to rise recently. Further increases in
building materials prices are expected. Nearly all manufacturers reported continued
increases in raw materials prices, and about half of the factories contacted
had raised their output prices from a year ago. Manufacturing input and output
prices are expected to continue rising in coming months, but the rate of increase
is expected to begin tapering off in the second half of the year.