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U.S. Federal Reserve Beige Book: Kansas City District (Text)

April 11, 2012

The following is the text of the Federal Reserve Board’s Tenth District-- Kansas City.

TENTH DISTRICT - KANSAS CITY

The Tenth District economy expanded at a faster pace in late February and March. Consumer spending improved, residential real estate activity rose solidly, and commercial real estate activity edged higher. Growth in the energy industry eased slightly but remained solid. Manufacturing firms reported further increases in activity, and agricultural conditions improved from the previous survey. Transportation activity picked up slightly, and high-tech service firms said sales growth was mostly solid. Bankers noted steady loan demand, better loan quality, and rising deposits. Prices rose slightly, but wage pressures were contained outside of a few skilled positions.

Consumer Spending

Consumer spending improved and expectations for the months ahead remained solid. Retail sales rose moderately from the previous survey, although several contacts noted concerns about lower discretionary spending due to rising gasoline prices. Store inventories remained stable and were expected to rise only slightly in future months. Auto sales rebounded strongly from the previous survey, with several dealers citing increased customer traffic and pent up demand as key reasons. Contacts said rising fuel prices have led to stronger sales of fuel efficient vehicles, and sales of large SUVs and trucks weakened. Expectations for future auto sales remained positive and inventories continued to increase. Restaurant sales improved, with further growth expected in coming months. Tourist activity edged higher, with several contacts noting increased business travel. Tourism contacts remained generally optimistic about future months.

Manufacturing and Other Business Activity

District manufacturing activity grew solidly, and expectations for future activity strengthened. Factory orders and shipments increased, and employment growth remained steady with some future hiring planned. Continued strong commodities-related activity boosted machinery production, and high-tech and aircraft manufacturing growth remained strong. Although rising gasoline prices and continued economic uncertainty restrained activity in several segments, most plant managers indicated moderate growth in capital spending plans. Growth in transportation activity picked up slightly, although several contacts cited driver shortages and higher contractor fuel costs as barriers to growth. Expectations for future sales were mostly positive, but capital spending plans among transportation firms were somewhat subdued. The majority of high-tech services firms reported solid growth in sales, but the pace of growth slowed somewhat from the previous survey. Several high-tech contacts noted higher activity in the energy and health care market, and future capital spending plans were generally positive.

Real Estate and Construction

Residential and commercial real estate activity increased in late February and March, and expectations were solid heading forward. Housing starts edged slightly higher, with several contacts in Nebraska noting increased demand due to the booming agricultural industry. Expectations for future homebuilding remained positive, and building materials were generally available. Sales at construction supply firms were stable, with some contacts noting increased business among multi-family and remodeling contractors, and expectations for future activity were favorable. Home sales rose markedly from the previous survey period and inventory levels fell, which contacts attributed to seasonal patterns, favorable weather, lower interest rates, and newfound optimism in the overall economy. Expectations for future home sales continued to strengthen, and home price levels improved slightly. Mortgage lending activity was positive and remained above year-ago levels, though contacts expected refinancing volume to slow somewhat as rates begin to rise. Commercial real estate activity continued to edge higher, and expectations for future sales were mostly positive. Vacancy rates dropped and were expected to fall further. Office prices and rents remained subdued but were slightly higher than a year ago, and expectations were largely flat. Several commercial real estate contacts in Oklahoma noted strong sales due to heavy activity in the energy industry, while a contact in Missouri expressed continued financing difficulties.

Banking

Bankers generally reported steady or stronger loan demand, stable or improved loan quality, and increased deposits. Overall loan demand was steady or improved. Most respondents reported stable to increased loan demand for residential real estate loans, while loan demand for commercial and industrial loans and commercial real estate loans remained steady. Loan demand was stable to weaker for consumer installment loans. Credit standards remained largely unchanged in all major loan categories, and the majority of respondents continued to report increased deposits. Most bankers reported stable or improved loan quality compared to a year ago, and every banker respondent believed the outlook for loan quality over the next six months would be steady or improving.

Energy

Energy activity grew solidly in late February and March, though the pace of growth slowed slightly from previous surveys. Contacts reported a sharp slowdown in natural gas drilling, with many noting a shift towards oil exploration. Natural gas prices reached decade-low levels in recent months, and most producers expected prices to stay low due to oversupply and mild weather. Crude oil prices climbed higher from the previous survey period, which many contacts attributed to continued Middle East conflict concerns. Contacts reported some shortages in equipment and labor, particularly for engineers and experienced technical support, and one producer noted continued delays in receiving permits for drilling on federal land.

Agriculture

Agricultural growing conditions improved since the last survey. Scattered rains increased soil moisture levels in many areas, although drought conditions persisted in some western areas of Kansas and Oklahoma. Winter wheat development was ahead of normal with most of the crop upgraded to good condition. Mild winter weather was favorable for calving and encouraged forage growth, reducing the need for supplemental feeding. Spring field work began early, and crop prices moved higher. Low cattle inventories trimmed beef production, and strong domestic and export demand pushed up cattle and hog prices. Operating loan demand declined as many producers used cash to buy crop inputs. Farmland values rose further and were expected to remain at record highs.

Wages and Prices

Prices rose slightly and were expected to continue to increase, but wage pressures were mostly contained outside of a few skilled positions. Retailers reported a slight uptick in prices with further increases anticipated. Manufacturing materials price increases continued and were expected to increase further, although fewer firms planned on raising selling prices. Higher prices for construction materials narrowed profit margins, as the majority of firms were unable to pass these costs through to customers. Transportation firms reported higher input prices, and increased food costs continued to impact profit margins and selling prices for hotels and restaurants. Wage pressures were still generally contained in most industries, although some firms reported continued difficulties in obtaining skilled labor.


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