September 3, 2008
Federal Reserve Districts
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Economic growth in the Tenth District improved slightly in late July and early August. Retail and restaurant sales rose, although auto sales remained weak. Manufacturing activity rebounded after weakening in early summer, and expectations for the next six months were positive. Residential real estate sales experienced a modest improvement, but sales volume and home prices remained well below year-ago levels. Commercial real estate activity held steady despite many contacts reporting an additional tightening of credit, but bankers reported a slight reduction in overall loan demand. Energy activity remained robust, and agricultural conditions were favorable. Labor markets softened, but some firms continued to report labor shortages. Wage pressures were largely unchanged, and most firms did not expect future wage increases. Additional gains in raw materials prices resulted in higher prices for finished products.
Consumer Spending Consumer spending was mixed in late July and early August, with retail and restaurant sales up while auto sales remained down. Although traffic and spending at malls weakened, other store managers reported that retail sales strengthened compared with the previous survey period and were in line with year-ago levels. Restaurant sales climbed while menu prices stabilized. Auto dealers continued to report sluggish sales, with large truck and SUV sales particularly lethargic. Auto industry respondents indicated that tightened credit conditions persisted. Tourism activity was flat since the last survey. Several contacts reported that consumers were traveling less and staying closer to home for vacations. Air travel remained slightly higher than year-ago levels, and hotel occupancy rates were stable but below expectations. Room prices continued to increase.
Manufacturing Manufacturing activity rebounded after weakening in June. Production levels and new orders increased considerably, especially for non-durable goods. Expectations for the next six months were also much stronger than in previous surveys. Export demand continued to be strong. Capital spending remained well above year-ago levels, and manufacturers anticipated high capital spending levels to persist. Manufacturers expressed concern over soaring raw material prices driven by elevated fuel and energy prices. Respondents reported that higher input prices were increasingly being passed through to final product prices.
Real Estate and Construction The Tenth District residential real estate market was mixed in late July and early August with sales strengthening slightly and prices continuing to fall. Residential sales improved modestly since the last survey period, but still remained well below year-ago levels. While sales of lower-priced homes and foreclosures increased, respondents commented that demand for higher-priced homes was weak. Home prices decreased in the current survey period and were anticipated to decline further in the next three months. Inventories of residential homes stabilized during the current survey period. Commercial real estate activity was unchanged since the last survey, and remained slow. Vacancy and absorption rates held steady, but sales were down slightly. Contacts reported modest increases in rental rates and prices. Survey respondents indicated that credit had tightened further and was a major constraint to current and future activity.
BankingBankers reported tighter credit standards and weaker loan demand than in the previous survey. Demand for commercial and industrial loans and commercial real estate loans fell appreciably, and demand for consumer installment loans and residential real estate loans declined modestly. As in the previous survey, half of respondents reported tighter credit standards for commercial real estate loans, while a quarter reported tighter standards for commercial and industrial loans. A few banks reported tighter standards for residential real estate and consumer installment loans. Assessments of current loan quality were little changed from the previous survey, but banks were somewhat more pessimistic about future loan quality. Bank deposits increased, and a couple of respondents noted that depositors were paying more attention to the financial soundness of banks in deciding where to place their funds.
EnergyDistrict energy activity remained robust in the current survey period. Drilling activity accelerated compared to the previous survey and was well above year-ago levels. Expectations for drilling activity remained strong, even as oil and gas prices fell from record levels to lower but still profitable levels. The number of active drilling rigs in the District was flat. Respondents continued to report easy access to credit, but the availability of qualified workers and equipment constrained drilling activity for some firms. Profit margins at bio-fuel firms improved with lower crop prices.
AgricultureAgricultural conditions remained favorable in late July and August. Wheat yields were reported larger than normal in Kansas, Nebraska, and Oklahoma, though dry weather limited production and yields in Colorado. Despite lagging crop development due to delayed planting, rising expectations for bumper corn and soybean harvests contributed to lower prices in recent weeks. Dry pasture conditions in parts of Colorado, Kansas, and Oklahoma prompted supplemental feeding for cattle with a few reports of herd liquidations. Farm credit conditions showed some sign of deterioration as the number of loan renewals and extensions increased and the rate of loan repayments slowed. High input costs trimmed farm income expectations, boosted loan demand, curbed capital spending plans, and limited farmland value gains.
Wages and Prices Price pressures continued to increase in late July and early August, but wage pressures remained steady. Prices of final manufactured products rose further as District factories faced surging raw material prices and fuel surcharges. Some retailers reported higher prices in the current survey period, but most expected prices to stabilize over the next three months. Restaurant contacts indicated that menu prices were flat despite increased food costs. Some contacts continued to report labor shortages, but wage pressures remained largely unchanged. Most respondents did not expect to raise wages in the next three months. However, a number of firms were instituting more flexible work schedules or shorter work weeks to alleviate employee concerns with high gasoline prices. District layoff announcements exceeded hiring announcements in July, but hiring announcements rebounded in August with net hiring gains erasing July's losses.