September 3, 2014
The Tenth District economy grew modestly in July and early August, and contacts remained optimistic about future growth. Consumer spending increased modestly with slightly higher sales reported by retailers and auto dealers, while restaurant and tourism contacts experienced moderate growth. Manufacturing growth slowed somewhat yet remained positive, and expectations for future activity remained solid. Construction activity was stronger, and was expected to continue to expand at a modest pace. Bankers reported steady loan demand, as well as stable loan quality and deposit levels. Crop prices, along with farm income expectations, were lower due to improved growing conditions and elevated crop production levels. Energy-sector activity increased, with firms noting a modest rise in oil well drilling. Wage pressures increased slightly since the last survey period, particularly for some skilled trade positions. Prices grew modestly, and were expected to rise at the same pace going forward.
Consumer Spending
Consumer spending increased modestly in July and August, although contacts in some industries were slightly less optimistic about future sales growth than in previous surveys. Retail sales edged higher and store inventories fell sharply. Several retailers noted stronger sales of home improvement and household items. Expectations for future retail sales remained solid, with inventory levels expected to stabilize. Auto sales increased slightly and were modestly above year-ago levels, but the rate of expected future sales growth slowed mildly. Contacts said mid-sized cars and small SUVs sold particularly well. Auto inventories fell slightly and were expected to continue to decrease. Restaurant sales grew moderately, although future activity was expected to remain steady. Tourism-related activity continued to rise, with conditions considerably better than a year ago. Tourism contacts expected solid activity heading into the early fall months.
Manufacturing and Other Business Activity
Growth in District manufacturing activity slowed somewhat, but expectations remained positive. Production growth eased at both non-durable and durable goods-producing plants, particularly for food and metals producers. Growth in shipments and new orders also moderated, as did order backlogs, and employment levels fell slightly in August. Expectations for future factory activity rose slightly and remained solid. Manufacturers' capital spending plans decreased slightly, but were still above year-ago levels. Transportation, professional, and high-tech firms reported fairly stable sales growth from the previous survey, and expected growth to edge higher in coming months. Several transportation contacts also mentioned continued high demand for construction products. Meanwhile, growth in wholesale trade fell back, with further easing expected.
Real Estate and Construction
District real estate activity expanded modestly in July and early August, supported by increased construction and stronger sales activity. Residential home sales edged up, with sales of low- and medium-priced homes remaining more robust than sales of higher-priced homes. Home prices increased further, and inventories rose slightly compared to the previous survey period. Residential real estate contacts expected home prices and sales to grow modestly and inventories to decrease slightly over the coming months. Housing starts increased slightly, and sales of construction supplies continued to increase at a moderate pace. Residential construction activity was expected to expand at a modest pace with stronger anticipated sales, starts, and traffic of potential buyers. Commercial real estate and construction activity strengthened further, with lower vacancy rates and increased sales and absorption; expectations were for moderate sales growth over the next few months.
Banking
Bankers reported steady overall loan demand, stable loan quality, and unchanged deposit levels relative to the previous survey. Respondents reported a minor decrease in demand for commercial real estate loans, and demand for consumer installment loans was somewhat softer. Most respondents reported steady demand for agricultural loans. Demand for commercial, industrial and residential real estate loans was slightly weaker compared to the previous survey. Most bankers indicated loan quality was unchanged compared to a year ago, and a majority of bankers expected loan quality to remain the same over the next six months. Credit standards remained largely unchanged in all major loan categories. In addition, deposit levels stayed constant.
Agriculture
Improved growing conditions and the potential for record crop production this fall depressed prices and lowered farm income expectations since the previous survey period. The majority of the District's corn and soybean crops were rated in good condition but improved yields may not offset the effect that recent price declines will have on income. District farm income remained well below year-ago levels even with strong profits in the livestock sector due to rising cattle and hog prices. Demand for farm operating loans rose further but loan-to-value ratios remained relatively conservative. Still, some bankers reported loan repayment rates had weakened since last year and also noted a rise in loan renewals and extensions. Despite lower farm income, cropland values generally held steady during the growing season while strong demand for high-quality pasture supported modest gains in ranchland values.
Energy
District energy activity edged higher in July and early August. Drilling activity rose modestly, particularly for oil wells, and expectations on activity levels remained solid for the upcoming months. Crude oil rig counts reached their highest levels in seven years, while natural gas rig counts remained steady but low. Oil prices eased in early August, which contacts attributed to unchanged global supply and fewer supply threats in the Middle East. Despite slightly lower prices, local producers did not expect drilling plans to be negatively affected. Natural gas spot prices slid to the lowest level this year in the midst of mild summer temperatures and steady supply; however, prices remain higher than a year ago. Most energy contacts expected oil and natural gas prices to fall slightly through the coming months, but indicated capital expenditure plans remained solid.
Wages and Prices
Over the reporting period, prices rose modestly in most industries, and wage pressures increased slightly. Retail prices continued to increase moderately, and most retailers expected prices to continue to move up at a similar pace in the coming months. Raw materials prices in the manufacturing sector grew slightly, while manufacturers' selling prices maintained their slight growth rate from the previous survey period. Transportation input and selling prices rose modestly, and firms expected input prices to rise further in the near future. Restaurant menu prices continued on their moderate upward trend, reflecting rising food costs. Construction materials prices moved slightly higher and builders expected prices to continue to rise. Wage pressures were slightly higher in most industries. Many contacts reported difficulty in finding qualified workers across a range of skill levels and industries.