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The Tenth District economy generally held steady in late July and August. Consumer spending was supported by seasonal and automotive incentives, while restaurant and hotel spending was subdued. The manufacturing sector held steady and plant managers expected a modest rise in production in coming months. Residential real estate activity softened and commercial real estate contacts indicated market conditions remained fragile. Banking conditions remained tepid partly due to moderately declining loan demand and a negative outlook for loan quality. Activity in the energy sector stabilized with a slight rise in the number of active drilling rigs. Falling grain prices and weak livestock exports put downward pressure on agricultural profits. Even though input prices were expected to rise, producers did not anticipate passing additional costs through to retail prices. Wage pressures remained low and few firms planned to hire new workers.
Consumer activity since the last survey period was generally stable. Retail sales were supported by consumer purchases of seasonal products, especially apparel, during the back-to-school season. Increased customer traffic led some District retailers to expect a rise in sales. Auto dealers reported that the cash-for-clunkers program, along with other dealer incentives, stimulated sales of new, fuel efficient cars, but hindered used car sales. Still, vehicle inventory levels declined. In addition, fewer dealers reported difficulty accessing credit. Restaurants reported weaker sales partly due to a decline in average check size. Tourism spending remained solid but was expected to wane as the vacation season ends. Even though hotel occupancy rates have fallen, average daily room rates rose slightly.
Manufacturing and Other Business Activity
Since late July, activity in the manufacturing sector was mostly flat, while activity in the transportation and high-tech sectors strengthened. Durable goods production dropped while non-durable goods production held steady. After further inventory reductions, manufacturers expected production to strengthen in coming months. In addition, plant managers anticipated current employment levels would hold and capital spending would remain stable. Several transportation contacts noted improved activity partly from an uptick in raw material shipments. Technology-related firms reported stronger sales, supported by federal government contracts and stimulus spending. Some manufacturing and transportation contacts felt input price increases could trim profit margins because of limited opportunities to pass through additional costs.
Real Estate and Construction
After strengthening in the last survey period, the residential real estate market softened, while commercial real estate conditions weakened further. While residential real estate agents noted increased buyer traffic, building suppliers reported slower sales to builders for new home construction. Demand remained weak for high-end properties, although the first time homebuyer tax credit boosted sales of entry-level homes. Following seasonal trends, home inventory levels were expected to rise in coming months. Mortgage activity slowed, largely due to a drop in refinancings. Commercial real estate conditions continued to erode, with reductions in completions and construction underway. Vacancy rates were little changed since the last survey period, but remained well above year-ago levels. Absorption rates declined further, placing additional downward pressure on rents. Access to credit remained tight. District contacts were concerned that lower commercial real estate values would hinder upcoming loan renewal and refinancing activity.
Bankers reported weaker loan demand, increased deposits, and a continued negative outlook for loan quality. Overall loan demand declined at a slightly faster pace than in the previous survey. Demand for commercial and industrial loans and commercial real estate loans fell moderately, while demand for consumer installment loans continued to edge downward. Bankers also reported lower demand for residential real estate loans for the first time since late last year. Some banks continued to tighten credit standards on commercial real estate loans, but credit standards for other loan categories were little changed. Loan quality remained substantially lower than a year ago, and about half of respondents expected loan quality to decline further over the next six months. Deposits rose moderately after showing little change in the previous survey.
Energy activity stabilized in late July and August. After substantial declines during the last year, the number of active drilling rigs in the District rose slightly. Drilling activity was expected to hold steady in coming months due to ample oil and natural gas supplies, subdued demand, and limited availability of financing for exploration. Though some natural gas producers expected prices to rise as the winter heating season approached, others felt high inventory levels would restrain price increases. Wyoming coal production rose during the survey period but remained below year-ago levels. Ethanol profit margins stabilized with higher crude oil prices and lower corn costs.
While agricultural growing conditions remained positive, income projections weakened slightly since the last survey period. Favorable growing conditions and an upward revision to crop estimates contributed to a decline in corn and soybean prices, trimming expected profits for producers. Despite a slight improvement in fed cattle prices, an extended period of negative profit margins coupled with declining cattle inventories prompted some feedlot consolidations. Income losses steepened for hog producers amid sluggish domestic and foreign demand for pork products. Farmland values stabilized at or above year-ago levels. Demand for non-real estate farm loans rose, and the rate of loan repayments declined. Fewer District contacts reported that collateral requirements remained elevated, and farm interest rates were little changed.
Wages and Prices
Producer prices generally held steady while consumer prices eased, and soft labor markets kept wage pressures low. Though manufacturers reported that input prices leveled off since the last survey period, some plant managers anticipated an increase in the cost of raw materials, especially fuel and steel. Still, most firms did not plan to raise prices on finished goods. Builders noted higher costs for petroleum-based materials such as roofing shingles, and transportation industry contacts also commented on rising oil prices. Retailers continued to discount prices and anticipated further price reductions, while restaurants held menu prices steady. Few contacts reported difficulty hiring workers, and the majority of firms did not plan to raise wages.