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The Tenth District economy continued to expand modestly in October and early November. Retail sales increased and were expected rise further, but the travel and tourism sector remained weak. Manufacturing activity also grew moderately, with production, new orders, and exports rising since the last survey period. Residential real estate recovered further, while the commercial real estate market continued to deteriorate. Energy activity rose slightly, as higher prices boosted exploration for crude oil in particular. The agricultural outlook also improved with higher commodity prices. On the other hand, District bankers reported that loan demand weakened and loan quality declined. Contacts reported that prices of finished goods and services declined modestly, and no evidence of wage pressures was reported.
Consumer spending rose in October and early November, but was supported by heavy price discounting. Most District retailers reported increased sales, especially for mid-priced, durable items such as appliances. Sales of high-priced and luxury items generally continued to decline, although some jewelers reported increased sales. Most retailers reported declines in inventories. Retailers expected sales to strengthen and for prices to steady over the next three months, along with further inventory reductions. Auto dealers reported stability in recent sales activity and were optimistic about their prospects going forward. The market for larger trucks and SUVs was reported as recovering. In the tourism sector, hotel occupancy rates were down markedly compared to year-ago levels, and the outlook was characterized as grim. However, air traffic rebounded somewhat from lower levels during the summer.
Manufacturing and Other Business Activity
District contacts reported that manufacturing production increased moderately in October and November, but production remained well below the previous year's levels. Volume of shipments and new orders also rose, while employment leveled off following a year of decline. Export orders expanded moderately, with more substantial growth expected over the next six months. Expectations for future factory activity were generally optimistic. Sales and capital expenditures in the high-tech services sector grew solidly, and sales were expected to increase more robustly in the near term. Contacts in the transportation sector also reported increased sales and capital spending. However, one contact said a reduction in the number of competing carriers had allowed some District trucking companies to maintain freight volume despite lower shipping demand overall.
Real Estate and Construction
The residential real estate market showed further signs of recovery in October and early November, but conditions in the commercial real estate market continued to erode. More housing starts and increased traffic from potential buyers were reported by area home builders, while new and existing home sales enjoyed a solid rebound from the previous year's levels, leading to a moderate overall decline in inventories. Inventory reductions, in turn, helped to stabilize home prices in the District, although prices remained below year-ago levels in most areas. Realtors reported that the increase in sales was in large part driven by first-time home buyers taking advantage of the federal tax credit. Sales were strongest for lower-end homes and investor properties, particularly bank-owned foreclosure properties, while sales of luxury homes were anemic. In the commercial real estate market, already low absorption rates continued to fall, putting downward pressure on rents. Construction remained very distressed, although some demand for smaller projects was reported. Sales of commercial real estate continued to decline, pushing down prices, but fewer contacts reported a sales drop than in previous survey periods. District contacts reported that valuations have fallen 20 to 30 percent from their peak in some areas of the District. A number of contacts stated that higher collateral requirements have been impeding smaller businesses engaged in real estate development projects.
Bankers reported weaker loan demand, increased deposits, and a continued negative outlook for loan quality. Overall loan demand fell at about the same pace as in the previous survey. Demand for commercial and industrial loans fell moderately, and demand for commercial real estate loans edged downward. On the other hand, respondents reported little change in demand for residential real estate loans and consumer installment loans. Some banks continued to tighten credit standards on commercial real estate loans, but credit standards for other loan categories were unchanged. About half of respondents reported lower loan quality than a year ago, an appreciably smaller fraction than in the previous survey. However, well over a third of banks expect loan quality to decline over the next six months, similar to the previous survey. Deposits continued to rise, with most categories sharing in the increase.
Responding to continued gains in crude prices and a recent upturn in natural gas prices, energy activity rose slightly in the most recent survey period. However, the rig count remained well below the peak level of mid-2008. Higher crude oil prices also translated into stronger ethanol prices and profits, spurring a rebound in ethanol production. Crude oil prices were expected to build upon recent gains and natural gas prices were expected to edge up over the next three months. But District contacts reported that natural gas production had not declined as significantly as expected given the steep drop in drilling over the last year. The efficiency gains in drilling operations over the past year and the activation of previously drilled but untapped wells was expected to preclude any energy sector employment gains in the near term.
The agricultural outlook improved in October and November with rising commodity prices. Despite reports of above-average corn and soybean yields, grain prices have risen due to improved export activity and a delay in the fall harvest. Wet weather pushed back the fall harvest in all District states and slowed winter wheat planting, especially in Oklahoma. Cattle and hog prices have edged up, but remained below breakeven prices due to rising feed costs. District contacts reported further reductions in livestock supplies through herd liquidations. District bankers reported having ample funds for creditworthy borrowers and expected farmland values to hold steady in coming months.
Wages and Prices
District contacts reported moderately lower prices for finished goods and services and few wage pressures since the last survey period. Purchasing managers said that input prices generally rose, driven by higher commodity prices, and they expected input prices to increase further going forward. Output prices were reported as modestly lower but were expected to stabilize over the next six months. Consumer prices largely decreased as a result of the use of heavy discounting to bolster sales. Hotel rates were down significantly in light of weak demand, but restaurant menu prices were stable. District contacts generally did not report any wage pressures or plans to raise wages in the near term.