September 11, 2002
Growth in the Tenth District economy showed some signs of moderating in late July and August, although business contacts remained generally optimistic about future economic activity. Consumer spending was not quite as strong as earlier in the year, the recovery in manufacturing appeared to lose some momentum, and some commercial real estate markets weakened further. On the positive side, residential construction remained solid, and energy activity held on to previous gains. In the farm economy, corn and soybean crops were in bad condition due to the drought. As in previous surveys, wage and retail price pressures were virtually nonexistent, while prices for some manufacturing materials continued to increase.
Consumer Spending
Retailers in the district reported that sales were flat to slightly
lower in late July and August compared with earlier in the summer.
On a year-over-year basis, sales were largely unchanged in most
places. Among merchandise categories, home furnishings and apparel
were strongest, while sporting goods continued to show some
weakness. Store managers generally reported that inventory levels
were in line with expectations. Nearly all managers remained
optimistic about sales in coming months and were preparing to
increase stock levels for the fall season. Motor vehicle sales
held steady in August after picking up following the reintroduction
of financing incentives in July. However, most dealers reported
that sales were slightly below year-ago levels. Looking ahead,
dealers expect sales to increase modestly with the start of
the new model year and will build inventories accordingly. Travel
and tourism remained solid in most of the district but slowed
in Colorado, where a slump in business travel has held down
hotel occupancy rates in Denver and the recent rash of wildfires
has reduced out-of-state tourist visits.
Manufacturing
The recovery in district manufacturing activity appeared to
pause in late July and August, with factory activity showing
fewer signs of improvement than in previous surveys. Production
and shipments remained a little below year-ago levels following
steady increases during most of the first half of the year.
Most firms were operating at moderate levels of capacity, and
plant managers said they expected factory activity to increase
over the next six months. However, firms continued to show little
enthusiasm for new hiring or capital spending, saying they were
waiting for further signs of improvement in the overall economy
before making any major new commitments.
Real Estate and Construction
Residential real estate activity remained solid in late July
and August, but some commercial real estate markets declined
further. Single-family construction in most places continued
to be above year-ago levels, with starts stronger for entry-level
houses than for higher-priced homes. Most builders expect home
construction to continue on a steady pace for the remainder
of the year and do not expect any significant difficulties in
obtaining materials. Home sales remained solid in most of the
district in late July and August, although the inventory of
unsold homes was up in Denver. Sales were particularly strong
for entry-level homes. Most realtors expect a slight slowdown
in activity in coming months due to increased caution on the
part of buyers. Mortgage lenders reported a sizable increase
in demand for home loans, particularly for refinancings. Lenders
reported that, compared with the previous survey, more refinancings
were for the purpose of taking cash out than for reducing the
amount or term of the loan. Mortgage demand is generally expected
to remain solid in coming months. Commercial real estate activity
in district cities either remained weak or contracted further.
Realtors reported that sales and prices of office space declined
again in Denver and Tulsa, while vacancy rates continued to
edge up in several places. Some "build-to-suit" office projects
continued to come online across the district, but speculative
building was virtually nonexistent. Commercial realtors expect
office conditions to remain weak for the foreseeable future.
Banking
Bankers reported that loans and deposits both held steady since
the last survey, leaving loan-deposit ratios unchanged. Demand
rose somewhat for home equity loans, edged down for commercial
real estate loans, and was generally unchanged in other loan
categories. On the deposit side, increases in liquid accounts
such as demand deposits and money market deposit accounts were
offset by decreases in large CD's and small time deposits. All
respondent banks left their prime lending rates unchanged, and
most banks also held their consumer lending rates steady. Banks
did not report any changes in lending standards.
Energy
Energy activity in the district remained strong in late July
and August. The count of active oil and gas drilling rigs in
the region held steady after rising earlier in the summer. Oil
prices rose and natural gas prices in most of the district were
largely unchanged since the last survey. Natural gas prices
in Wyoming, however, remained depressed and are expected to
stay low until a new pipeline to California is completed next
spring. Looking ahead, most district energy contacts expect
slow, steady growth in energy demand.
Agriculture
The district's corn and soybean crops were in poor condition
due to the drought. As a result, district bankers expect crop
insurance payments to be a significant source of income for
producers this year. Conditions for winter wheat planting were
generally poor because of the lack of moisture, which could
result in reduced acreage. Poor pasture conditions have forced
many ranchers to buy hay and other feedstuffs sooner than normal
and at rising prices. Across the district, corn was being harvested
early for forage rather than grain. Some cattle producers were
placing young cattle in feedlots earlier than normal and still
others have been forced to sell part of their breeding herd.
Rural bankers indicated small business activity was sluggish,
especially in predominantly agricultural areas.
Wages and Prices
Wage and price pressures were virtually nonexistent across the
district in late July and August. Labor markets remained soft,
with most employers having no problems finding quality workers.
As in previous surveys, labor shortages were reported for only
a few select occupations. However, some contacts reported labor
negotiations were slightly more difficult than in the recent
past, and layoff announcements fell sharply in August after
rising steadily in the spring and early summer. Wage pressures
remained very subdued across the district, but many contacts
expressed concern about the cost of rising health care premiums.
Retail prices were largely unchanged from previous surveys and
are expected to remain flat in coming months. Some stores, however,
reported smaller markdowns than during past summer clearance
seasons. Builders reported generally flat materials prices in
late July and August. As expected, lumber prices leveled off
after rising earlier in the summer, and builders do not expect
any significant price increases in the fall. Some manufacturers
reported further rises in materials prices, including steel
products and petroleum-based chemicals. Many plant managers
expect moderate materials price increases to continue through
the fall.