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The Tenth District economy expanded modestly in late July and early August, with the pace of growth easing somewhat from the previous survey period. Labor markets continued to expand solidly, energy activity increased further, and commercial real estate activity improved. However, growth in consumer spending and manufacturing activity slowed, and residential real estate activity declined. Agricultural conditions generally remained unfavorable due to drought. Wage pressures continued to build, but wholesale price pressures eased slightly and retail price pressures remained modest.
Consumer spending expanded more slowly in late July and early August than earlier in the summer. Slightly fewer retail contacts reported increases in sales from the previous survey period, and several store managers reported a decline in expenditures on discretionary items, such as jewelry. However, most stores continued to report year-over-year gains in sales. The share of store managers satisfied with inventory levels fell slightly, and retail contacts were somewhat less optimistic about future sales than in previous surveys. Similar to other retailers, the share of auto dealers reporting recent increases in sales eased somewhat in late July and early August. Auto sales were still generally down versus a year ago, and sales of trucks and SUVs were particularly weak at most dealerships. Auto contacts were less upbeat about future sales than earlier in the summer, and several dealers expected an increase in inventories in the months ahead. Travel and tourism activity fell slightly in late July and early August compared with the previous survey period. Airport traffic and hotel occupancy rates edged down but were still at about year-ago levels. Most hotel and tourist attraction operators expected modest increases in activity heading forward.
Growth in manufacturing activity eased somewhat in late July and early August, while expectations for future activity strengthened. Plant managers reported that production, shipments, and new orders continued to increase, but at a slower rate than in the previous survey period. Oil and gas-related manufacturing remained very strong in the District, though, and several aircraft parts manufacturers announced sizeable expansions. Capital spending plans in general rose solidly, following a moderate easing in prior surveys. Contacts' optimism about future shipments and orders also rebounded, and expectations of backlogs increased. Most factories reported little change in material availability, although some contacts noted concerns about future availability due to increased railway congestion.
Real Estate and Construction
Residential real estate activity fell in late July and early August, while commercial real estate activity increased. Home builders reported a decline in home starts and expected further declines in the months ahead. Similarly, most residential real estate agents said homes sales were down from the previous survey period and that they anticipated additional slowing. Inventories of unsold homes continued to rise across the District, with sizeable numbers of foreclosures contributing to the increase in some cities. In most of the District, contacts reported that the weakest recent housing starts and sales have been for high-end homes. In higher-priced Colorado, on the other hand, most contacts reported that entry-level and mid-range homes have experienced the weakest recent activity, while construction and sales of high-end homes have generally remained solid. Home prices were generally flat compared with the previous survey period and up only modestly from a year ago. Mortgage lenders reported weaker demand for both home purchase loans and refinances, and they expected continued weakness in the months ahead. Commercial real estate activity improved in late July and early August. Office vacancy rates fell in most cities, and prices for office space were generally higher. Most commercial real estate agents expected continued solid improvement in office markets in coming months.
Bankers reported that loans increased somewhat since the last survey, while deposits held steady. Demand for agricultural loans rose slightly, while demand for commercial and industrial loans edged down. On the deposit side, CDs were higher than in the prior period, while demand deposits were slightly lower. A few respondents reported raising their lending rates since the last survey, and lending standards were basically unchanged.
Energy activity continued to increase in late July and early August. The count of active oil and gas drilling rigs in the region rose slightly and remains well above year-ago levels. With energy prices expected to remain high, contacts continued to be very optimistic about future drilling activity. Most contacts reported that labor shortages were the main constraint on expansion of drilling and that many companies were bidding away workers from other firms.
Agricultural conditions generally remained unfavorable in late July and early August. Since the last survey, widespread rains provided some relief from the drought, but above-average temperatures generally prevented crops from improving. Pastures also continued to suffer from lack of moisture, causing cattle producers to either rely on dwindling hay supplies or liquidate herds. Despite the drought, the corn crop was reported to be in relatively good shape and development is ahead of the previous year. Contacts in the District generally expected production and yields to closely mirror those in 2005, though crop yields would be highly variable and dependent on local precipitation.
Labor Markets and Wages
Labor markets continued to expand solidly in late July and early August, and wage pressures increased. As in previous surveys, hiring announcements outpaced layoff announcements by a sizeable margin. Many of the new jobs announced were at aircraft parts manufacturing plants, call centers, and professional services firms. The majority of contacts continued to report labor shortages. Among the workers reported to be in short supply were experienced sales workers, oil and gas workers, and skilled manufacturing workers. The share of businesses experiencing wage pressures rose slightly, and a larger share of contacts than in previous surveys also expected wage pressures to continue to intensify.
Wholesale price pressures eased slightly in late July and early August, while retail price pressures remained modest. The share of manufacturers reporting rising raw materials prices edged down from the previous survey but was still very high. The most frequently cited materials price increases by manufacturers were for copper and aluminum. Most contacts anticipated raw materials prices to continue to rise in the months ahead, but some firms expected prices to level off. The percentage of factories reporting higher finished goods prices also fell slightly from earlier in the summer, and the share of firms planning output price increases in the months ahead eased somewhat as well. Home builders reported further increases in some building materials prices, particularly copper and cement. This trend was generally expected to continue. Most retailers reported flat selling prices and expected only modest increases in the coming months.