December 3, 2014
The Tenth District economy grew slightly in October and November, and most contacts expected modest growth over the coming months. Consumer spending increased modestly with retail contacts reporting moderate growth and auto, restaurant, and tourism contacts reporting a slight decline. Manufacturing production rose slightly, and overall manufacturing activity was anticipated to strengthen further over the next few months. District commercial real estate activity increased moderately, while residential real estate activity declined slightly. Looking ahead, real estate construction was expected to increase modestly. Contacts in the banking industry reported steady loan demand and loan quality and slightly higher deposit levels. Despite strong profit in the livestock sector, total farm income was below year-ago levels and was expected to fall further due to low crop prices. Energy-sector activity remained steady, and respondents were cautiously optimistic about future drilling activity. Prices grew modestly alongside a slight rise in wages and an increasingly tight labor market.
Consumer Spending
Consumer spending increased at a modest pace since the previous survey, and most contacts expected faster growth in the months ahead. Retail sales grew moderately and were well above year-ago levels. Several retailers noted stronger sales of apparel and winter-weather products, though sales for some higher-priced items were again characterized as weak. Expectations for future sales remained solid, and inventory levels were expected to rise somewhat over the next few months. District auto sales declined in October and November. However, dealer contacts anticipated some increase in sales in the months ahead and noted solid sales for small SUVs and pickup trucks. Auto inventories rose but were expected to move lower in the coming months. Restaurant sales continued to decline but were slightly above year-ago levels. Restaurant contacts expected this weak activity to persist heading into the winter months, and several contacts continued to comment on the rising cost of labor. District tourism activity fell further but was flat compared to the previous year. However, tourism activity was expected to improve modestly in coming months.
Manufacturing and Other Business Activity
District manufacturing and other business activity rose modestly in October and November. Total manufacturing production expanded slightly, with production of aircraft parts and equipment posting particularly strong gains. However, activity at food, plastics, and chemical plants continued to decline. Contacts reported solid gains in factory shipments and order backlogs, and expectations for future factory activity strengthened further. However, firms reported rising difficulties in attracting and retaining certain key workers, with several contacts noting increased labor costs. Manufacturers' capital spending plans remained positive and above year-ago levels, but the pace of expected growth moderated slightly. Transportation and wholesale trade firms reported moderate sales growth since the previous survey period, and activity remained considerably higher than a year ago with firms generally optimistic about future months. Professional and high-tech firms noted a drop in sales since the previous survey period, although sales were up solidly compared to last year, and contacts anticipated strong activity in coming months. One large high-tech firm said the government had shifted toward small businesses for local defense contracts, which had negatively affected their business.
Real Estate and Construction
District real estate activity edged up in October and November, as a slight decline in residential real estate activity was offset by moderate growth in commercial real estate activity. Residential home sales decreased slightly, reflecting typical seasonal sales patterns, with sales of low- and medium-priced homes continuing to outpace sales of higher-priced homes. Home prices increased modestly, and inventories decreased slightly since the previous survey period. Expectations for residential real estate sales and prices were slightly positive, but inventories were expected to continue to decline modestly. Housing starts increased at a modest pace, and construction supply sales were flat. Residential construction activity was expected to increase modestly as contacts anticipated higher sales, starts, and traffic of potential buyers. Commercial real estate activity continued to increase at a moderate pace with lower vacancy rates and stronger sales, prices, and construction activity. The commercial real estate market was expected to continue to expand moderately over the next few months.
Banking
Bankers reported steady overall loan demand, stable loan quality, and slightly higher deposit levels compared to the previous survey period. Respondents indicated a decrease in the demand for agricultural loans. However, most contacts noted steady demand for consumer installment loans and commercial and industrial loans. Demand for both commercial and residential real estate loans was mixed compared to the last survey. Most bankers indicated loan quality was unchanged compared to a year ago, and a majority expected loan quality to remain the same over the next six months. Credit standards remained largely unchanged in all major loan categories. In addition, a larger number of bankers reported increasing deposit levels than in the previous survey.
Agriculture
Farm income expectations fell sharply since the last survey period as above-average corn and soybean yields were not expected to fully offset low crop prices. District contacts reported current levels of farm income that were significantly lower than last year despite some support from crop insurance and strong profits in the livestock sector. Although reduced income for crop producers had contributed to a rise in the need for short-term loans to the farm sector, agricultural bankers reported that sufficient funds were available for qualified borrowers. Following several years of very strong growth, District cropland values declined slightly in recent months and were holding just above year-ago levels. However, improved profitability in the livestock sector and the potential for herd rebuilding had supported demand for high-quality pasture and contributed to moderate gains in ranchland values.
Energy
Despite the current downward trend in oil prices, District energy-sector activity remained steady in October and November. Most contacts continued to report a high level of drilling activity, and active oil and gas rigs rose through early November, particularly for natural gas. Respondents remained optimistic about future drilling but were closely monitoring the price of oil, which was close to many firms' breakeven price. Oil prices were at a four-year low due to signs of an oversupplied global market and were expected to weaken marginally in coming weeks. Natural gas prices edged up in line with seasonal norms and colder weather and were anticipated to rise slightly as demand increases through the winter. Total revenues in the energy sector were expected to decline somewhat as a result of lower oil prices.
Wages and Prices
Prices in most industries grew modestly in October and November, and wage growth increased slightly, with many contacts reporting labor shortages. Retail prices edged up, and restaurant menu prices maintained their modest rate of growth. Manufacturers' raw materials prices increased, although at a slightly slower pace than in the previous survey, and finished goods prices rose modestly. Transportation input prices continued their moderate decline, but selling prices in the sector remained unchanged. Construction materials prices held steady relative to the previous reporting period, but most contacts expected slight growth moving forward. Wages in the retail sector increased in preparation for the holiday season, and retailers anticipated further increases in coming months. Wages grew slightly in the transportation sector, and manufacturers reported modest wage gains as they continued to highlight difficulties finding skilled labor. Respondents noted labor shortages for machinists, skilled construction trade workers, engineers, IT developers, and truck drivers.