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The Tenth District economy continued to expand in June and early July, albeit at a slightly slower pace than in the previous survey. The manufacturing, housing, energy, and travel sectors all posted strong gains, and labor markets continued to improve. On the other hand, retail and auto sales were generally unchanged, and commercial real estate remained weak. Wage and retail price pressures were still muted, and manufacturing price increases eased slightly.
Consumer Spending
Consumer spending in the district generally held steady in June and early July. Most retailers reported flat sales compared with the previous survey, although sales were still above year-ago levels at most stores. Among product categories, sales of home items were generally characterized as strong, while no category was consistently reported as weak. Most store managers were satisfied with inventories, and virtually all managers anticipate solid increases in sales through the fall. Motor vehicle sales in the district were also generally unchanged compared with previous months and were flat to slightly lower compared with a year ago. Dealers appeared relatively satisfied with inventory levels, although some planned to trim stocks modestly heading forward. Most dealers anticipate steady sales through the fall, as manufacturer incentives are generally expected to remain in place. Travel and tourism activity continued to improve solidly in June and early July. Airport traffic set new records in several district cities and was above year-ago levels throughout the district. In addition, contacts reported that there were still few signs of a negative impact of high gasoline prices on tourism.
Manufacturing
District manufacturing activity continued to grow strongly in June and early July. Most manufacturers were operating at high levels of capacity utilization, and new orders generally remained strong. Many firms reported they were adding employees and extending hours, in some cases by adding an entire shift. With the strong recent activity, supplier delivery times were up considerably from a year ago, and a number of plant managers continued to report difficulties obtaining steel and some other raw materials. Coal was also in short supply in some areas due to rail transportation bottlenecks, and some coal-using plants were considering temporary production cutbacks as a result. Firms generally reported steady increases in capital expenditures, and nearly all plant managers expect growth in factory output to remain very strong for the rest of the year.
Real Estate and Construction
Residential real estate activity continued to grow solidly in June and early
July, while commercial real estate remained generally weak. Single-family housing
starts rose further in most cities and were above year-ago levels across much
of the district. As in the previous survey, most builders said demand was strongest
for entry-level houses. Shortages of some materials--particularly steel products
and cement--were reported in several areas, and some builders were worried that
cement could become even more difficult to obtain in the months ahead. Builders
generally expect solid construction activity to continue for the rest of the
year, with little, if any, impact from rising interest rates. Residential realtors
reported further increases in home sales--particularly for low- and mid-priced
homes--as well as moderate rises in home prices since the previous survey. Heading
forward, realtors generally expect sales to continue at a high level and home
prices to increase modestly. Mortgage lenders reported that demand for home
purchase loans was up moderately in most areas, more than offsetting a general
easing in refinancing activity. Lenders expect refinancings to continue to taper
off in the months ahead, but for overall mortgage demand to remain solid. Commercial
real estate activity remained generally weak. Vacancy rates were up slightly
in some areas, and commercial construction was generally flat. On the positive
side, realtors in Denver reported that demand from new tenants resulted in some
decline in "shadow" space--space that was previously leased but unoccupied and
not on the market. Commercial realtors also expect some improvement in office
markets by the end of the year.
Banking
Bankers report that loans increased and deposits held steady since the last
survey, boosting loan-deposit ratios. Demand rose for commercial and industrial
loans, residential construction loans, and commercial real estate loans. Demand
for other loan categories was little changed from the previous survey. On the
deposit side, all types of accounts held steady. All respondent banks left their
prime lending rates unchanged, and all banks either raised their consumer lending
rates or planned to do so in the near term. Lending standards were unchanged.
Energy
District energy activity expanded solidly in June and early July. The count
of active oil and gas drilling rigs in the region was up moderately from the
previous survey and up strongly from a year ago. In addition, some producers
said they would have expanded even further were it not for continuing regulatory
constraints and labor and equipment shortages. Although problems finding workers
and adding equipment are expected to intensify in the months ahead, most contacts
anticipate further slight increases in drilling, as energy prices are generally
expected to remain elevated.
Agriculture
Agricultural conditions remained solid in June and early July. Rain and cool
weather significantly improved pasture conditions, although not enough to spark
herd expansion. The rain arrived too late for the winter wheat crop, however,
causing intermittent sprouting that decreased quality in some regions. Spring-planted
crops were generally in good condition, although the persistence of cool weather
far into the season slowed maturations, particularly for corn. Overall, bankers
and producers were optimistic about farm incomes this year, expecting them to
be close to last year's strong levels.
Wages and Prices
Wage and retail price pressures generally remained muted in June and early July, and growth in manufacturing prices eased slightly. Labor markets continued to show solid improvement, with hiring announcements exceeding layoff announcements by a wide margin. Moreover, district layoffs since the last survey were largely concentrated in the telecommunications industry, while hiring announcements were distributed across a broad spectrum of industries. Most firms did not have to raise wages more than normal to attract workers, though some worker shortages and wage pressures continued to be reported in the energy, manufacturing, transportation, and health care industries. As in previous surveys, retailers reported flat selling prices for most items and expect most prices to remain stable heading forward. Prices for some furniture and flooring items, however, did continue to rise slightly, and some managers expect rising delivery fees to boost retail prices modestly in the months ahead. Builders reported further price increases for most construction materials and generally expect these increases to continue. Manufacturers also continued to report rising materials and output prices, though these increases were somewhat smaller than in previous months. Factories expect further increases in raw materials and finished goods prices in the months ahead. District steel producers, for example, said they planned to raise output prices in the second half of the year due to strong demand and rising costs of steel scrap. These plans represent a change from the previous survey, when the same firms said they planned to lower output prices in response to an easing in steel scrap prices in the spring.
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Minneapolis