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The Tenth District economy expanded at a moderate pace in late July and August. Consumer spending increased, driven by strong tourism spending, and labor markets continued to expand. Manufacturing activity rebounded slightly, and commercial real estate activity continued at a solid pace. Energy activity remained at strong levels, and agricultural conditions were favorable. On the other hand, residential real estate weakened further. Some banks tightened real estate lending standards, but bankers tended to report that overall loan demand was up slightly. Wage pressures remained largely contained and most price pressures eased slightly.
Consumer spending increased from the last survey period, and contacts generally expected solid future growth. Most retail stores reported a slight uptick in sales from previous months, with several contacts indicating favorable returns from the back-to-school season. Sales of apparel and technology items were especially strong, while sales of home-related items remained weak. Store inventories continued to be relatively flat, with a reduction expected in coming months. Auto dealers reported a modest increase in sales and saw little effect from high gasoline prices, though sales of SUVs and trucks slowed somewhat. Some dealers reported concerns about the slumping housing market and the possible impact on credit availability for automobile purchases. Travel and tourism activity expanded solidly in late July and August. Hotel and tourist attraction revenues were up markedly from a year ago, and contacts expected further growth. Restaurants also reported strong sales growth, despite rising food input costs.
Manufacturing activity rebounded slightly following sluggish growth in the last survey period, and producers remained optimistic about future activity. Plant managers reported moderate increases in production, shipments, and orders from earlier in the summer, particularly among producers of machinery and high-tech equipment. On the other hand, factory employment was largely flat, as turnover and the lack of qualified workers was still an issue for some firms. Although most contacts reported continued solid capital spending, a few firms planned slight reductions in expenditures due to the recent volatility in financial markets.
Real Estate and Construction
Residential real estate activity declined further, while commercial real estate activity continued at a healthy pace. Home sales weakened in late July and August and were well below year-ago levels. Most contacts expected the slowdown to persist for some time, until foreclosures stabilize and the oversupply of homes is reduced. Although home inventories leveled off somewhat, they still remained higher than a year ago and were projected to rise in coming months. Home prices throughout the District edged down and are anticipated to continue this trend. Builders in several cities reported steady recent activity, but expected decreases in the future due to a tightening of mortgage standards. Commercial real estate activity remained solid. Vacancy rates edged down in most cities and absorption rates were steady. Rent values remained elevated from a year ago, and prices for office space were expected to rise in the near future. Most contacts were upbeat about future commercial activity despite some decrease in the availability of credit.
Bankers reported that loan demand edged up and deposits held steady since the last survey. Commercial real estate loans accounted for most of the increase in loan demand. While most banks reported no change in deposits, a few said they had experienced inflows from commercial customers with ample supplies of cash. Although most respondents continued to report no change in credit standards, several said they tightened standards for real estate loans. Most banks reported little or no exposure to subprime mortgages. However, some noted that recent difficulties in this segment could make it harder to sell mortgages to secondary lenders or reduce the supply of qualified mortgage borrowers. A few respondents said they viewed the turmoil as an opportunity to expand their share of the local mortgage market. As a whole, banks expected little change in overall loan quality over the next six months.
Energy activity continued at solid levels in late July and August. The majority of contacts reported stable drilling activity and expected increased activity heading forward. However, the lack of qualified labor continued to put a strain on expansion, and the recent fall in natural gas prices caused some firms to cut back on exploration. One Wyoming firm reported natural gas storage capacity at all-time highs due to the lack of available pipelines.
Agricultural conditions remained generally favorable in late July and August. Nebraska and Colorado reported above-average wheat yields after June rains limited the wheat harvest in Oklahoma and Kansas. After a period of dry weather, August rains improved growing conditions for the corn and soybean crops, which placed some downward pressure on crop prices. Livestock prices remained solid, although rising production costs trimmed margins for hog producers and cattle feedlot operators. Farm credit conditions continued to be strong and spending on crop equipment rose, led by a boom in grain storage facilities.
Labor Markets and Wages
Labor markets continued to expand, and wage pressures remained largely contained. District hiring announcements outpaced layoff announcements, and a sizeable number of firms experienced labor shortages. Several firms reported difficulties in filling sales and manager positions, and in hiring production, technical, housekeeping, and restaurant wait staff. Wage pressures were flat versus the previous survey period, although contacts anticipated a slight increase in coming months.
Price pressures moderated in late July and August, with slower growth of manufacturing prices and a slight easing in retail prices. District manufacturing contacts reported fewer increases in raw materials prices, especially for food and metals, with further easing expected. Factory finished goods price increases also slowed slightly and were projected to remain relatively constant in coming months. The majority of retailers reported flat selling prices but expected prices to rise slightly heading forward. Restaurants anticipated a further increase in menu prices in response to pass-through of past food cost increases.