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The district economy remained solid in May but appears to have slowed from the rapid growth of recent years. Extremely tight labor markets in much of the district may be contributing to the slowdown. Retail activity slowed following strong performance earlier in the year, and construction also cooled from the burst of activity in March and April. In contrast, manufacturing activity improved considerably from the sluggish conditions experienced in the recent past, and energy activity finally picked up in response to the recent increases in oil prices. In the farm economy, the winter wheat crop remained in good condition, but losses continued for many livestock producers. Although labor markets in most of the district remained very tight, wage pressures eased somewhat from previous surveys. Retail prices continued to edge up, as did prices for construction materials, especially sheetrock. After a long period of decline, prices for several manufacturing materials also began to rise.
Retail Sales
Retail activity in the district slowed somewhat in May after performing exceptionally well from the beginning of the year through the Easter season. Still, sales remained well above year-ago levels. Home furnishings enjoyed another strong month of sales following the construction boom in March and April. The slower overall sales volume led store inventories to creep up in May. Most managers were not especially worried, however, since expectations for activity over the next three months remained robust in the wake of continued strong consumer confidence, low unemployment rates, and persistent income gains. Expecting higher sales in the near future, many stores plan to continue building inventories into the summer. Automobile sales were weaker in May than in previous months but stayed above year-ago levels. Trucks and SUVs continued to lead in sales growth, but truck dealers in general and GM dealers in particular complained of difficulties obtaining enough of these vehicles to meet demand. Overall, car dealers were unhappy with current inventories, with most trying to expand in anticipation of strong sales in coming months.
Manufacturing
Tenth District factory activity showed marked improvement in May, as manufacturing conditions strengthened at the national level and steady progress in Asia and a fast recovery in Brazil seemed to reduce the difficulties plants were facing in their export markets. Capacity utilization at district factories nearly matched the high levels posted last summer and was much higher than in our previous three surveys. Most manufacturing materials remained generally available in May, but producers of construction materials expressed concerns about the future availability of some inputs if building demand remains high. Input lead times were largely unchanged, but lead times for several finished products, such as sheetrock and brick, continued to edge up. Inventories at district factories were similar to the recent past, with the majority of managers remaining satisfied with current stock levels.
Housing
Construction activity slowed last month from unusually strong growth in March and April, but builders remain overwhelmingly optimistic about the future. The destruction caused by the recent tornadoes in Oklahoma and Kansas has created additional demand for construction services in those states; and with consumers remaining upbeat about the economy, builders anticipate another burst of activity in coming months. New home starts increased at a much slower pace in May than in the previous two months but remain comfortably above year-ago levels. Problems with sheetrock availability continued to mount, pushing prices for construction materials up for the third straight survey. The additional demand created by the tornadoes has most builders expecting continued availability problems in the future. Home sales in the district were steady in May, remaining just above year-ago levels. Inventories of unsold homes were largely unchanged, staying at moderate levels. Mortgage bankers reported another decline in refinancing activity last month, with overall mortgage demand falling further below year-ago levels. But most lenders cautiously share builders' enthusiasm about the future and expect a rise in demand in coming months.
Banking
Bankers report that loans and deposits both edged up last month, leaving loan-deposit ratios unchanged. Demand rose for residential construction loans, commercial real estate loans, and commercial and industrial loans. Demand for home mortgage loans slowed. Small increases in demand deposits, NOW accounts, and large time deposits were partly offset by a drop in small time deposits. All respondent banks left their prime lending rates unchanged, and all but a few left their consumer lending rates unchanged last month. Although most banks expect to maintain their prime rate and consumer lending rates over the near term, a few banks expect to raise these rates in the near future. Lending standards were unchanged.
Energy
District energy activity finally improved in May after nearly a year and a half of steady decline. The rig count rose 7 percent in May, responding to the recent jump in oil prices. Still, the number of rigs operating in the district remained more than 35 percent below year-ago levels. The price of West Texas Intermediate crude oil continued to rise in early May, reaching nearly $19 per barrel, but began to taper off by the end of the month. The price for the month as a whole was almost 20 percent higher than in the previous year. Natural gas prices also increased in May, rising above year-ago levels for the first time since last summer.
Agriculture
The district's winter wheat crop was in good condition, with average yields expected in most areas. Spring plantings fell slightly behind schedule due to recent excessive rains in some areas of the district. Losses continued to pile up for hog producers in the region. While many of the district's small hog producers have liquidated, most medium- and large-sized producers continued to operate in spite of the severe toll of the last six months. The weak farm economy has led to a slowdown for many mainstreet businesses through rural parts of the district. Despite some hitches earlier this year, district bankers report a generally smooth process in obtaining Farm Service Agency guarantees for their weakest farm loan customers.
Wages and Prices
Labor markets remained very tight in most of the district in May, especially for construction workers, but wage pressures eased somewhat after increasing in the two previous surveys. Builders continued to face the biggest difficulties finding capable workers, with framers especially in short supply. Among retailers the biggest needs remained entry-level workers and sales associates, while for manufacturers, general production workers became the toughest to find. Wage pressures eased slightly across the board but remained vitally present. Retail prices continued to edge up in May and are expected to rise slowly in coming months. Prices for some manufacturing materials, especially oil, rose considerably from our last survey, although most managers expect a leveling off in the near future. Sheetrock prices jumped again in May and most builders expect further increases in prices for construction materials.
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Minneapolis