December 4, 2013
The Tenth District economy continued to grow modestly in November. Consumer spending increased slightly, with retail stores moderately optimistic about future sales, and energy activity remained solid. District manufacturing activity grew further, and transportation firms reported a slight uptick in shipments. Commercial real estate activity strengthened slightly, and bankers noted steady loan demand, better loan quality, and stable deposits. Residential sales and construction slowed somewhat but remained slightly above year-ago levels, while high-tech firms reported some moderation in sales growth. District farm incomes fell due to a considerable drop in crop prices, which also increased operating loan demand. Prices were up slightly in most industries, while wage pressures were contained outside of a few skilled positions.
Consumer Spending
Consumer spending increased modestly from the previous period, and contacts were cautiously optimistic heading into the holiday season. Retail sales edged higher from the previous survey and were up considerably from a year ago. Several retailers noted strong sales of sportswear and appliances. Expectations for future sales rose, and store inventories increased moderately. Auto sales were flat in November, and future sales were expected to remain unchanged. Contacts said sales were strongest for small SUVs and pickup trucks, while sales of large, full-size vehicles remained weak. Auto inventories increased, although many dealers expected levels to stabilize somewhat in the next three months. Restaurant sales edged down, but activity remained similar to last year. Many contacts noted an increase in food costs and uncertainty about the future expense of employee health care. Tourist activity remained sluggish, although occupancy rates improved at a few hotels. Tourism contacts were slightly less optimistic about future activity.
Manufacturing and Other Business Activity
District manufacturing activity continued to grow at a moderate pace in November. Production at durable goods-producing plants grew more slowly than in the previous survey, but production of nondurable goods products picked up, particularly for chemicals and plastics. Employment conditions improved, with several respondents indicating plans to hire more skilled workers. Manufacturers' capital spending plans remained solid, and overall expectations for future activity increased from the previous survey period. Transportation activity edged higher, and several firms reported strong shipments of perishable food products. Expectations for future transportation activity improved slightly from the previous survey, while capital spending plans were mostly unchanged. Sales growth among high-tech firms moderated somewhat but was positive overall, with several firms citing a reduction in government contracts due to sequestration and the government shutdown. However, expectations for future high-tech activity increased, and capital spending plans were generally favorable.
Real Estate and Construction
Residential real estate activity slowed somewhat but remained stronger than last year, while commercial real estate conditions strengthened slightly. Housing starts were flat since the previous survey, although activity was still higher than a year ago. Expectations for future homebuilding remained upbeat, but a few builders noted difficulties finding qualified workers. Sales at construction supply firms rose and many firms were optimistic about future activity. Home sales slowed in November, though activity remained slightly better than last year and inventory levels decreased. Some contacts attributed the slowdown to inventory shortages and the upcoming implementation of new qualified mortgage standards. Residential realtors noted positive sales of low to mid-range properties, but said higher priced homes over $400,000 sold poorly. Expectations for future home sales eased slightly, but prices were generally rising and expected to increase further. Mortgage lending activity remained weak, as both home purchase and refinancing loans slowed further. Commercial real estate activity grew modestly, and contacts were increasingly optimistic heading forward. Vacancy rates edged down, and absorption rates rose in some cities. Office prices and rents increased at a slower rate than the previous survey, although further increases were anticipated in coming months.
Banking
Bankers reported steady overall loan demand, improved loan quality, and stable deposit levels in November. Respondents reported increased demand for commercial and industrial loans and commercial real estate loans, and steady demand for consumer installment loans. Demand for residential real estate loans declined during the survey period. Bankers reported improved loan quality compared to a year ago, and nearly all bankers expected the outlook for loan quality to either improve or remain the same over the next six months. Credit standards remained unchanged in all major loan categories, and respondents reported stable deposits.
Energy
Energy activity remained solid in November. Oil rigs increased slightly in the District, particularly in Wyoming, while natural gas rigs held steady. Natural gas prices remained low, although several contacts expected higher prices in coming months due to the expected colder winter. Crude oil prices moderated slightly from the previous survey, but remained generally strong. Several contacts noted increasing U.S. supply, lower global demand, and easing sanctions in Iran could constrain oil prices heading forward, although most producers expected prices to remain high enough to spur further drilling in the months ahead.
Agriculture
A steep drop in crop prices, which partly reflected better-than-expected corn and soybean yields, lowered District farm income and boosted demand for farm operating loans since the last survey period. Some livestock operators in Western Nebraska also faced significant herd losses due to a severe October snowstorm. Farm income was expected to remain weaker than last year despite some support from crop insurance and a gradual improvement in livestock sector profitability resulting from lower feed costs. With reduced incomes, agricultural bankers reported the number of requests for loan renewals and extensions edged up and demand for new farm operating loans also increased. Farmland values rose further, but the pace of gains moderated and most contacts expected values would hold steady through the end of the year.
Wages and Prices
Prices rose modestly in most industries, and wage pressures were largely contained outside of a few skilled positions. Retail prices remained flat and were anticipated to be generally steady heading forward. Prices of manufacturing materials grew slower than in the previous period, and fewer firms planned on raising selling prices. Transportation firms reported slightly higher input prices, and restaurants noted rising food costs and menu prices. Construction materials prices moved higher, particularly for concrete and drywall, and selling prices increased at most supply firms. Many contacts noted concerns about future costs from new health care and other types of regulations. Wage pressures increased slightly but were still generally contained in most industries. Some firms reported continued difficulties in obtaining skilled labor, such as truck drivers, construction workers, and machinists.