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The Tenth District economy expanded more modestly in late November and December than in the previous survey period. Overall holiday consumer spending was little changed from a year ago, but sales in some areas were hampered by extremely bad year-end weather. Growth in manufacturing activity moderated from the previous survey, and businesses' capital spending plans remained modest. The rebound in residential real estate lost some steam, and commercial construction activity weakened further. Bank loan demand remained sluggish, and overall loan quality was poor. By contrast, energy activity continued to rise from low levels, and agricultural conditions improved. Price pressures were limited, and wage pressures remained low due to weakness in the labor market.
Consumer spending growth softened somewhat from the previous survey. Overall, holiday retail sales were little changed from a year ago. Some contacts reported slight increases from a year ago, but extremely bad weather limited holiday sales in other areas. Store managers generally reported stronger sales of discounted items and winter gear, while sales of luxury items such as jewelry were relatively weak. Store inventories were up slightly, but most contacts expected a decrease in the months ahead. Restaurant traffic edged up marginally from the previous period, and expectations were more positive. Auto sales dropped after steadying in the previous survey, though most dealers expected some improvement in future months. Auto inventories were still fairly high and expected to rise, and some contacts noted continued difficulties obtaining customer financing. Travel and tourism activity weakened further, with one contact noting considerably less business travel. Nearly all tourism contacts expected a continued slowdown in activity.
Manufacturing and Other Business Activity
Growth in manufacturing activity moderated somewhat in late November and December, while other business activity was mixed. Overall growth in factory production slowed, while employment remained essentially flat. Plant managers also reported smaller gains in shipments and new orders. Expectations for future factory activity were slightly less optimistic than in previous surveys, but factory output was still expected to rise moderately in the first half of 2010. Transportation services activity slowed slightly in late November and December, but contacts expressed more optimism about future months. High-tech services firms reported mostly favorable business conditions and were generally positive about the months ahead. Despite generally positive outlooks, businesses' capital spending plans--especially among manufacturers--were fairly modest for 2010, as considerable excess capacity remains. Still, some business spending was occurring to replace outdated IT and other equipment.
Real Estate and Construction
Residential real estate activity eased somewhat after a rebound in the previous survey, and the downturn in commercial real estate activity continued. Housing starts dampened slightly, as several builders noted continued financing difficulties, but expectations improved from the previous survey. Home sales also eased from the previous survey, but levels were higher than a year ago and expectations strengthened due to the renewed homebuyer tax credit. Sales were strongest in the low-end market, with continued weak demand for higher-priced homes.Several real estate agents reported sales were limited by tighter credit restrictions and appraisal guidelines. Mortgage lenders reported that overall mortgage activity edged down slightly from last month, with fewer home purchase and refinancing loans. Commercial real estate activity continued to deteriorate across the District, with few improvements expected in the near future. Vacancy rates continued to rise, and prices and rents declined further. Construction supply firms reported especially weak sales, which most contacts attributed to a slowdown in lending and weak commercial construction activity.
Bankers reported weaker loan demand, stable deposits, and a continued negative outlook for loan quality. Overall loan demand declined at a somewhat faster pace than in the previous two surveys. Demand fell moderately for both commercial and industrial loans and commercial real estate loans. In addition, demand for residential real estate loans and consumer installment loans edged down. A few banks tightened credit standards on commercial real estate loans. As in the previous survey, however, credit standards for other loan categories were little changed. When asked about the cause of the continued weakness in bank lending, two-thirds of respondents cited weak demand from creditworthy borrowers, and some banks mentioned pressure from regulators. Almost all respondents reported lower loan quality than a year ago, and about a third expected loan quality to decline further in the next six months. Deposits were essentially unchanged, following several months of steady growth.
Energy activity was up modestly from the previous survey, but remained below year-ago levels. Most contacts reported an increase in drilling activity and were optimistic about the months ahead, as crude oil prices remained relatively high and natural gas prices finally turned upward. With natural gas inventories still at historically high levels, however, some producers worried that gas prices might fall if recent cold winter weather across the country did not continue. Most energy firms expected their capital expenditures to increase or remain unchanged over the next twelve months, with very few planning decreases.
Agricultural conditions improved since the last survey period. Farmers enjoyed above average corn and soybean yields, especially in Nebraska and Kansas. Despite planting delays, the winter wheat crop was progressing normally and was reported in good condition with ample snow cover. The post-harvest rise in corn and soybean prices spurred strong marketing opportunities and higher incomes for farmers. Livestock prices moved higher, narrowing losses for producers. Cattle feeding enterprises were operating at breakeven levels, but dairy and hog operations still faced significant losses. District contacts reported that farmland values firmed in the fourth quarter amid robust demand for good quality farmland and a limited number of farms for sale.
Wages and Prices
Price pressures were modest, and wage pressures remained limited due to weak labor markets. Manufacturers reported mostly stable prices, but some noted lower profit margins due to rising commodity prices and little ability to pass through. Overall retail prices continued their downward trend, and most contacts expected prices to fall further in coming months. However, builders and transportation firms reported a slight uptick in input prices. Almost no firms reported labor shortages, resulting in little if any wage pressures. Hiring plans at many firms also remained minimal, which some firms attributed to uncertainty surrounding future employee health care costs.