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The District economy strengthened in October and early November, despite headwinds from the residential and commercial construction sectors. Additional gains in consumer spending boosted optimism for holiday sales among retailers and auto dealers. With moderate gains in October and November, manufacturing plant managers expected production activity and new orders to rise further with a pick-up in export activity. Energy and agricultural activity rose robustly with strong demand, low inventories, and a weaker dollar lifting commodity prices. In contrast, residential and commercial construction remained weak, although commercial real estate sales and vacancy rates were expected to improve in coming months. Banking conditions remained stable with more District bankers expecting improvements in loan quality. Despite higher raw material prices, wholesale and retail prices held steady. Wage pressures remained subdued, though some firms were hiring for seasonal and specialized labor.
Consumer spending improved further in October and November, and contacts were optimistic about future sales heading into the holiday season. District retailers reported stronger sales with limited discounting on merchandise. Contacts indicated an uptick in durable goods sales, especially appliances, while sales of luxury items were slow. After declining in the last survey period, auto dealers reported a slight improvement in sales, especially for trucks and used cars. Dealers anticipated demand would continue to strengthen through year-end, and some planned to hire sales staff and service technicians. Restaurant traffic was up, while the average check amount declined. With the end of the summer travel season, average room and occupancy rates edged down at District hotels, but tourism activity was stronger than expected.
Manufacturing and Other Business Activity
After rebounding in the last survey period, District manufacturing activity continued to expand, and many firms expected further growth in the next six months. While production levels varied across industries, some of the strongest gains were at food, fabricated metal, and electronics manufacturers. In general, new orders, shipments, and production activity strengthened in recent weeks, contributing to rising order backlogs and shrinking finished goods inventories. In the next six months, plant managers expected production, shipments and orders, especially for export, to strengthen further. In addition, more factory managers planned to increase staff or make capital purchases in coming months. High-tech firms also reported a rise in sales that was expected to continue through year-end. After slowing in the last survey period, activity in the transportation sector stabilized and some firms noted a shortage of qualified drivers.
Real Estate and Construction
Residential and commercial construction remained sluggish in October and November, while commercial real estate sales and vacancy rates were expected to improve in coming months. After contracting with the end of the homebuyers tax credit program, a few District homebuilders noted a slight uptick in housing starts. Still, District home prices edged down and sales continued to fall heading into the typical winter lull in home buying activity. District contacts noted that the starter home market remained active, but long lead times for selling mid- and upper-priced homes were boosting inventories and limiting "move-up" opportunities. Mortgage loan activity rose as homeowners refinanced existing mortgages to lower payments and shorten terms. Commercial construction activity declined and was expected to remain weak over the next three months. District commercial real estate contacts reported little change in vacancy rates, absorption rates, and prices. Some firms, however, reported an uptick in sales and expected vacancy rates to edge down in coming months.
Bankers reported stable loan demand, increased deposits, and an improved outlook for loan quality in the recent survey period. Overall loan demand continued to hold steady as demand for commercial and industrial loans, commercial real estate loans, and consumer installment loans remained stable. In contrast, bankers reported stronger demand for residential real estate loans. Compared to the previous survey, credit standards remained unchanged in all major loan categories. Loan quality was essentially unchanged compared to one year ago. Bankers, however, expected loan quality to improve over the next six months. Deposits, especially for transaction accounts and savings accounts, increased after having been flat since late last year.
Agricultural conditions improved since the last survey period. Favorable weather conditions across the District facilitated an early corn and soybean harvest with yields less than original estimates but slightly better than their five-year average. The winter wheat crop was progressing normally. Crop prices continued their steady climb through the fall harvest, boosting incomes for crop farmers but raising feed costs for livestock producers. Farmland values and cash rental rates strengthened further with higher farm incomes and robust demand for good quality farmland from both farmers and non-farm investors. Farm operators also increased spending on farm equipment and grain storage bins. Demand for farm operating loans was steady, and agricultural bankers reported ample funds were available for qualified borrowers at historically low interest rates.
District energy activity continued at a robust pace in October and November. The number of active drilling rigs in the District rose further, primarily due to natural gas expansion in Oklahoma and
New Mexico. Producers expected drilling activity to remain elevated over the next three months; however some firms reported that equipment shortages, difficulty finding qualified labor, and availability or cost of financing were constraining drilling activity. District contacts anticipated a modest increase in natural gas prices as the winter heating season approached. Crude oil prices were also expected to strengthen with rising demand and a weaker dollar. After surging in the last survey period, Wyoming coal production continued apace. With higher ethanol prices, profits at ethanol plants held steady despite higher corn prices raising operating costs.
Wages and Prices
Prices paid for raw materials rose further in October and November, but selling prices and wages generally held steady. District manufacturers reported higher raw materials prices and expected additional increases in the next six months. They also expressed a limited ability to pass on higher input costs to current finished goods prices. However, more factory managers expected to receive higher finished goods prices over the next six months. Restaurants paid more for food, but kept menu prices stable. After rising in the last survey, prices for building materials held steady. Though a limited number of firms were hiring, primarily for specialized labor or seasonal workers, few were raising wages to attract qualified applicants. Wage pressures were expected to remain subdued through the end of the year.