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The Tenth District economy continued to expand modestly from mid-November through year-end, although there was some softening in certain sectors. Manufacturing growth improved slightly, and District manufacturers were relatively upbeat. The energy and agriculture sectors remained robust. Holiday consumer spending was generally solid but slightly weaker than expected. Residential real estate prices and activity continued to decline, while commercial real estate softened slightly but remained relatively healthy. Wage pressures decreased throughout the District, but more firms reported that they expect to hire in the next three months. Price pressures were modest, but many sectors reported expectations of price increases over the near term.
Growth in consumer spending moderated since the previous survey but remained reasonably sound. Reports from retail stores were slightly weaker than in the previous survey, but half of respondents continued to report higher sales. More retailers reported less sales activity than planned. Some respondents mentioned poor weather conditions and power outages caused by ice storms as a cause of weaker retail activity. Few specific goods stood out as having particularly strong or weak sales, with the exception of relatively soft sales for gasoline and housing-related materials. Retail inventories were up from the previous month and from the previous year. Mall activity was flat year-over-year, but restaurants reported gains. Auto sales remained weak with a further build up in inventories. Fuel-efficient automobiles sold well relative to SUVs and large trucks. Auto dealers also suggested access to credit was more difficult. Hotel occupancy reports were well below those of the previous survey, but were more solid on a year-over-year basis.
Manufacturing activity grew moderately in December and firms were generally upbeat about future activity, although there were some exceptions. The number of firms reporting increased production rose modestly from November, while reports of increases in shipments and new orders were smaller than in the previous month. New orders for exports increased from the previous year, and manufacturing employment growth was expansionary for the first time in six months. Inventory reductions continued, but moderated from November. Manufacturers were slightly more upbeat about increases in orders, shipments, and employment than in the previous survey, and their capital spending plans largely remained intact.
Real Estate and Construction
Residential real estate activity continued to decline in the most recent survey period, while the comparatively healthy commercial real estate market softened slightly. Home sales continued to weaken and prices were reported lower, with expectations for further decreases in the near term. Lower-priced homes and “bargains” were reported as selling much better than high-priced homes in most areas. Expectations for sales volume improved slightly from the previous survey, but remained generally negative. Inventories of unsold homes were higher in most markets from the previous month and were up uniformly year-over-year. Contacts reported a continuing decline in housing starts. Commercial real estate activity remained relatively solid, although there was some reduction in rent increases. Commercial sales and leasing activity and vacancy rates were stable, but absorption rates were lower.
Bankers reported somewhat weaker loan demand, slightly tighter credit standards, and a moderate decline in deposits since the last survey. Demand for residential real estate loans again fell moderately. Demand also declined slightly for commercial and industrial and consumer installment loans. Some banks reported a further tightening of credit standards for commercial real estate loans, although there were fewer such reports than in the previous survey. Overall loan quality was slightly weaker, and respondents expected some deterioration in loan quality over the next six months. Bank deposits declined moderately, led by declines in NOW and money market deposit accounts.
District energy activity continued to rise in December. The strongest growth in drilling occurred in Oklahoma and Colorado, while winter drilling restrictions may have seasonally slowed expansion activity in Wyoming. In contrast to previous surveys, industry contacts reported financing and costs as their biggest growth constraint. Although respondents continued to report labor shortages for technical and engineering positions, few still listed labor shortages as their chief operating constraint, and some firms reported that labor shortages were not as severe as six months ago. Expectations for future drilling activity remained positive.
Agricultural conditions varied with local precipitation in December. Respondents in regions receiving abundant fall moisture reported the winter wheat crop and pastures to be in good to excellent condition. In drier regions, contacts reported poor or fair wheat crop and pasture conditions. Strong demand and record low global inventories fueled a post-harvest surge in crop prices which supported farm income gains for crop producers. Livestock operators, however, saw profits disappear with higher feed costs. Farmland sales picked up after fall harvest and District contacts reported further gains in farmland values and cash rental rates. Higher income levels facilitated debt servicing and capital spending, especially for equipment upgrades.
Labor Market and Wages
Labor shortages decreased slightly since November, while there was a slight increase in the number of firms expecting to hire in the next three months. Much of the decrease in labor shortages was attributed to seasonal changes in the retail and hospitality industries. The number of hiring announcements significantly outpaced layoff announcements in the District, with most of these announcements coming from aerospace, energy, and manufacturing. Overall wage pressures declined, with only the energy sector reporting some continuing wage pressure.
Price pressures in the District remained generally contained, but expectations of future price pressures were elevated. Retail prices were stable month-over-month, but more retailers expected price increases in the next three months relative to the previous survey. There was little change in expectations for food costs from the previous survey, but some contacts continued to report higher food costs than in the recent past. Builders reported little change in raw materials prices, although there was some expectation of price increases in coming months. The share of manufacturers reporting higher raw materials prices eased slightly, but a modestly larger share of firms expected higher prices in the next six months. Price pressures for finished manufactured goods eased from the previous period, but prices are still expected to be slightly higher in coming months. Most energy firms expected natural gas prices to increase in the near term, while most expected crude oil prices to remain unchanged or to decrease.