July 29, 2009
Federal Reserve Districts
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The Tenth District economy showed further signs of stabilization in June. Consumer spending was generally sluggish but improvements were noted in auto sales and tourism spending. Manufacturing activity expanded modestly, primarily in nondurable goods production. Residential real estate activity held steady; however, commercial real estate firms reported weakening market conditions. Employment in the energy sector continued to contract in response to low natural gas prices. Bankers reported weaker loan demand, stable deposits, and a continued negative outlook for loan quality. While growing conditions improved, agricultural profit opportunities softened, especially for livestock producers. Despite higher input prices, retail price pressures eased and little evidence of wage pressures was reported in District labor markets.
Consumer SpendingDistrict retailers reported a weaker than expected uptick in consumer activity since the last survey. General retailers reported a slight improvement in overall sales activity, highlighted by stronger sales for home furnishings, appliances, and other household items. Auto dealers reported an increase in sales volume in June, with the greatest unit gains in small new cars and all types of used cars. Dealers reported offering only a modest level of incentives to buyers and were largely satisfied with existing inventories; however, dealer access to credit remained tight. Demand for all types of apparel remained soft heading into the critical back-to-school season. Restaurant operators reported weaker overall sales and a continued decline in average check size. Tourism spending rebounded in June but remained below expectations, especially at mountain resorts. Casino revenues remained strong in Oklahoma and Missouri, but declined in other District states.
Manufacturing and Other Business ActivityThe Tenth District's manufacturing, transportation, and high-tech sectors showed tentative signs of increased business activity. The manufacturing sector reported a slight improvement in production, shipment volumes, and new orders in June--a marked improvement from the sharp contractions reported in the early spring. The strongest manufacturing production increases were reported in nondurable sectors. Durable goods production was flat and showed little sign of expansion, with sharp contractions in aviation and oil and gas-driven machinery sectors. District manufacturing firms reported an increase in weekly hours worked but did not expect to hire new workers for many months. New export orders returned to a near neutral position after showing weakness since last summer. Factory managers expected conditions to remain unchanged over the next six months. Technology-related firms reported increased business activity, with strength noted in clean technology and defense-driven aerospace. Like manufacturing, transportation firms reported a similar improvement in overall business activity.
Real Estate and ConstructionResidential real estate firms reported stronger sales volumes in June but commercial real estate activity weakened further. Home inventory levels improved further in all District states, with strong sales in the lower and middle price tiers of the market. Starter home sales remained strong due to first-time homebuyer tax credits and sales volumes improved for bank owned and investor properties. Housing prices remained firm in Kansas and Oklahoma, while foreclosures weighed most heavily on the Colorado and New Mexico housing markets. Home builders cited unfavorable borrowing terms, mounting foreclosures, and a slower than expected inventory adjustment as the major reasons limiting a construction rebound. Commercial real estate weakened further with declines in completions and construction underway. Vacancy rates in the District rose further and absorption rates declined. Few commercial real estate firms expected a recovery by the end of 2010, although some commercial builders noted increased competitive pressures from firms outside the region seeking opportunities in District markets. Further declines in commercial real estate prices and rents were expected. Commercial real estate firms said the market favored buyers and tenants, leaving them little negotiating leverage.
BankingBankers reported weaker loan demand, stable deposits, and a continued negative outlook for loan quality. Overall loan demand declined moderately after showing signs of stabilizing in the previous survey. Demand for residential real estate loans rose more slowly, while demand for commercial and industrial loans resumed declining following a brief pause in the last survey. Demand for commercial real estate loans and consumer installment loans also fell somewhat. Some banks continued to report tighter credit standards on commercial and industrial loans and commercial real estate loans, and a few banks reported tighter standards on consumer installment loans. Loan quality remained substantially lower than a year ago, and about half the banks expected loan quality to decline further in the next six months. Deposits were little changed, following a substantial increase in the previous survey.
EnergyThe energy sector remained a drag on overall District economic activity in June. Nearly all contacts reported no change in drilling activity and did not expect any improvement in the months ahead. Although national crude oil prices were above $60 per barrel, low natural gas prices limited drilling activity and encouraged well shut-ins. Low natural gas prices created a particular financial strain on Wyoming, Colorado, and New Mexico producers where the spread between regional and national prices remained large. Producers generally expected prices for both crude oil and natural gas to remain at or above current levels over the next three months. Several contacts reported considerable reductions in their workforce and have no plans to increase hiring in the near future. Many firms noted selectivity in their workforce reductions in order to retain critical high skill workers and the ability to respond quickly when pricing conditions improve.
AgricultureWhile growing conditions improved, profit opportunities softened for agricultural producers since the last survey period. Ample rainfall in June and early July aided growing conditions but declining commodity prices dampened farm income expectations. Though corn and soybean development was lagging due to cooler temperatures, crops were still reported in good condition. Due to weather damage, wheat producers in the southern portions of the District harvested fewer acres and reported below average yields; however, growers located further north anticipated above average wheat yields. Soft demand for meat continued to put downward pressure on livestock prices, and producers responded with further herd liquidations. Farmland values held firm, supported by the limited supply of farms for sale coupled with solid demand from farm operators and renewed interest from non-farm investors.
Wages and PricesDistrict contacts reported limited pass through of higher input prices and little evidence of wage pressures across District labor markets. Rising fuel costs pushed up producer prices, although few producers planned to raise output prices in the future. Builders reported higher prices for supplies, especially roofing products and asphalt. Manufacturers reported that raw materials and finished goods prices were largely unchanged. Retail prices edged down and were expected to soften further; however, restaurant menu prices increased. Only a small number of firms reported labor shortages, resulting in little to no wage pressures.