October 15, 2003
The Tenth District economy continued to expand in late August and September. Manufacturing strengthened further, and more firms than in previous surveys reported increased hiring and investment. Retail sales excluding autos rose slightly, housing activity remained strong, and the farm and energy sectors improved. On the other hand, auto sales fell after rising earlier in the summer. Commercial real estate markets also remained weak, although they showed some signs of stabilizing. Wage and price increases were generally modest, but some materials prices rose sharply.
Consumer Spending
Excluding autos, retail sales in the district continued to edge
higher in late August and September and were at or above year-ago
levels at most stores. Among product categories, sales of shoes,
men's and children's clothing, and most home items were strong,
while sales of women's apparel and electronics were somewhat
sluggish. Nearly all retailers expect sales to continue to increase
slightly, although several managers reported they would not
be confident about fourth quarter sales until consumer sentiment
improved somewhat. Most stores were satisfied with inventory
levels and plan typical seasonal increases to stocks in coming
months. In contrast to sales at retail stores, sales of motor
vehicles in the district fell somewhat in late August and September
after increasing earlier in the summer and were below year-ago
levels in most states. Auto sales in Colorado were particularly
weak, although dealers there reported a slight pick-up in buyer
traffic near the end of September. Most dealers expect new car
sales to improve in October. Despite slower auto sales since
the previous survey, most dealers reported that inventories
of unsold cars remained manageable, due to cautious inventory
building in recent months. Several dealers also reported that
used car prices have firmed recently, as fewer leased cars have
been coming back on the market. Reports on late summer tourism
activity at mountain resorts in the district were generally
positive, and convention business in Denver was strong.
Manufacturing
District manufacturing activity increased considerably in late
August and September, and managers remain optimistic about future
output. Plants generally reported higher levels of capacity
utilization than in the previous survey, and the volume of new
orders continued to rise. In addition, several firms reported
further increases in hours and a modest expansion of employment.
Moreover, capital spending rose above year-ago levels, as several
firms added new production space and increased their purchases
of machinery and IT equipment. On the negative side, contacts
in the aircraft manufacturing industry reported that their shipments
and orders continued to slide. Several other contacts reported
difficulties obtaining steel plate and tubing. Looking ahead,
most manufacturers expect continued expansion of production
and orders for the remainder of the year, along with modest
increases in employment. In line with these expectations for
stronger factory activity, firms also anticipate some building
of inventories of raw materials in coming months.
Real Estate and Construction
Residential real estate activity in the district remained strong
in late August and September, and commercial real estate markets
showed signs of bottoming out. Single-family housing starts
maintained a rapid pace in most district cities, although some
builders reported a slight easing in activity. Starts of entry-level
homes continued to be particularly strong. Most builders expect
single-family construction to stay solid for the remainder of
the year, provided mortgage rates remain low. Several builders
reported difficulty obtaining plywood, but other building materials
remained generally available. Home sales were steady in late
August and September and above year-ago levels throughout the
district. Most realtors expect sales to remain flat for the
rest of the year and anticipate only modest increases in home
prices. Mortgage lenders reported a sharp drop in refinancing
activity. Inquiries about refinancing picked up slightly at
the end of September, but lenders generally expect refinancings
to continue to slow. Demand for home purchase loans is expected
to hold steady. Most commercial real estate markets in the district
showed some signs of firming in late August and September after
weakening earlier in the summer. Sales of office space increased
slightly in some cities, while absorption and vacancy rates
were largely unchanged. However, realtors do not expect much
improvement in office markets for the foreseeable future, as
most markets have at least some excess supply.
Banking
Bankers report that both loans and deposits increased slightly
since the last survey, leaving loan-deposit ratios largely unchanged.
Demand edged up for residential construction loans, home equity
loans, and consumer loans. Demand for other loan categories
was little changed, with increased demand for home purchase
mortgages helping offset the slowing in refinancing activity.
On the deposit side, gains were widespread across categories.
All respondent banks held their prime lending rates steady,
and most banks also left their consumer lending rates unchanged.
No changes in lending standards were reported.
Energy
District energy activity continued to expand moderately in late
August and September, as energy prices remained relatively high.
Although natural gas prices fell slightly in September, they
were still 50 percent higher than a year ago and are expected
to remain elevated in coming months. The count of active oil
and gas drilling rigs in the region continued to edge higher
in September and was well above year-ago levels. The increase
in activity led to greater demand for skilled rig workers, and
energy contacts generally expect drilling activity to remain
solid through the winter.
Agriculture
Agricultural activity in the district improved in late August
and September, boosting prospects for farm income this year.
Cattle profits made a strong rebound after prices reached an
all-time high in early September, and yields on the district's
corn harvest were better than a year ago. Also, recent moisture
has provided excellent planting and growing conditions for the
winter wheat crop in many areas. Farmland values throughout
the district remain strong, and bankers report higher repayment
rates and lower renewals and extensions in their farm loan portfolios.
On the negative side, early yields on the district's soybean
crop have been below average due to the effects of this summer's
drought, and financial concerns persist for farmers located
in areas of prolonged drought.
Wages and Prices
Wage and price increases were generally modest in late August
and September, although some materials prices rose sharply.
Labor markets were still quite slack around the district. However,
the rate of layoff announcements slowed to a three-year low,
and more businesses than in previous surveys said they were
increasing their hiring plans. Most firms were offering only
cost-of-living increases in wages, while benefit costs continued
to rise rapidly. Some retailers reported discounting prices
to clear out back-to-school merchandise. Otherwise, retail prices
were unchanged and are expected to be flat to slightly higher
in coming months. Manufacturers reported some firming in finished
goods prices, but they continued to lack the ability to fully
pass input cost increases through to customers. Among manufacturing
and construction materials, prices for steel, petroleum-based
products, and plywood rose considerably. Manufacturers expect
some materials prices to continue to rise and anticipate only
modest increases in their pricing power.