The following is the text of the Federal Reserve Board’s Tenth District-- Kansas City.
TENTH DISTRICT - KANSAS CITY
The Tenth District economy improved moderately in late April and May. Retailers and restaurant contacts reported stronger sales, while auto sales declined. Both retailers and auto contacts expected increased activity in the months ahead. Manufacturing activity rose, and the high-tech services industry experienced modest growth. Transportation activity was flat and was expected to remain unchanged in the months ahead. Residential and commercial real estate activity increased solidly with higher sales and lower vacancy rates. Banking contacts reported slightly higher loan demand, improved loan quality and increased deposits. Agricultural growing conditions improved, and farmland values continued to climb. The energy sector expanded further, but the oversupply of natural gas was leading to a slower pace of expansion. Most sectors reported higher input prices and final goods prices, and expected further increases in the coming months. Wage pressures increased, and firms reported some difficulty in filling positions.
Consumer Spending. Consumer spending increased in the retail, restaurant and tourism sectors but declined in the auto sector. District contacts from every consumer sector expected stronger sales over the next three months. Retailers reported sharply higher sales compared to a month ago. Most product lines experienced gains including home goods such as dining tables, bedroom sets and appliances. Auto sales fell sharply with large SUVs and trucks continuing to be weak sellers. However, most auto contacts remained satisfied with current inventory levels. Restaurant contacts reported increased traffic and higher check amounts. Tourism activity increased in the District due in part to good spring weather. Hotel occupancy held steady as average room rates edged up.
Manufacturing and Other Business Activity. Manufacturing activity in the Tenth District improved in May, and expectations for future activity were stronger than in previous months. Both durable and non-durable goods manufacturers reported increased production. New orders and factory shipments increased during the survey period. Manufacturing contacts reported that capital spending plans were much improved, and several noted plans to expand into new products and markets. Growth in transportation activity was flat, and contacts reported higher input prices. Capital spending plans at transportation firms continued to be sluggish, and firms expected future activity to be unchanged. High-tech services firms reported moderate growth in sales, and expectations for future activity were strong. Several high-tech firms reported difficulty in finding experienced workers, especially qualified software developers.
Real Estate and Construction. Residential real estate activity improved during the most recent survey period, and commercial activity was solid. Housing starts were down compared to the previous survey, but builders expected new home construction to increase over the next three months. Housing materials were readily available, but several respondents had trouble finding skilled workers. Sales activity at construction supply firms surged during the survey period across all types of materials, and expectations for sales continued to be strong. Residential sales were much improved from the previous survey, and inventories continued to fall. Contacts reported that homes priced between $150,000 and $300,000 sold particularly well, but homes at the upper end of the market continued to be difficult to sell. Overall mortgage lending activity grew this survey period, but refinancing activity was flat. The majority of refinancing activity was due to lower payments in response to low interest rates. Commercial real estate activity was solid during the survey period, but there was some uncertainty about future activity. Vacancy rates fell, and contacts expected them to continue to fall over the next three months. Prices and rents were flat, but expectations were for some increases in the future. Several respondents believed that political uncertainty could create some weakness in the construction and commercial real estate markets.
Banking. In the recent survey period, bankers generally reported slightly stronger loan demand, improving loan quality, and increased deposits. Overall loan demand was improving as most respondents reported stable to increased loan demand for residential real estate loans, commercial and industrial loans, and commercial real estate loans. Demand for consumer installment loans remained steady. Credit standards remained largely unchanged in all major loan categories, and the majority of respondents reported steady or increased deposits. Most bankers reported improving loan quality compared to a year ago. Additionally, every banker believed the outlook for loan quality over the next six months would be steady or improving.
Agriculture. Agricultural conditions improved since the last survey. District contacts reported that winter wheat development was roughly three weeks ahead of normal. Most of the winter wheat was rated in fair-to-good condition. Spring planting was nearly complete, and early emerged crops were rated in good condition. Tight crop supplies kept cash prices high, while the prospects of a bumper 2012 crop weighed on futures prices. High feeder calf prices continued to support strong profits for ranchers. In contrast, profits at cattle feedlots were strained by high feed and feeder calf costs. Strong export demand underpinned profits for pork producers. Farmland values rose further, buoyed by farm incomes and revenues from mineral rights leases.
Energy. Energy activity continued to expand in May. Drilling activity increased since the previous survey. However, contacts reported that storage reservoirs were full and that an oversupply of natural gas was beginning to result in a slowdown in the pace of drilling. Oil prices fell during the survey period, and contacts believed that a slumping world economy would keep prices steady over the next three months. Natural gas prices rose somewhat but remained near historically low levels, and contacts expected prices to stay low due to oversupply. Firms reported that they would like to expand their workforces in the coming months, but noted that it had been difficult to find experienced field workers and engineers.
Wages and Prices. District contacts reported higher prices for both inputs and finished goods, and wage pressures increased from low levels. Manufacturers continued to report higher raw material prices, but prices increased at a slower pace than earlier this year. Finished goods prices rose slightly in April and were flat in May. Manufacturers expected higher prices for both raw materials and finished goods over the next six months although the number of contacts expecting an increase fell slightly. Builders reported higher input prices, and retailers reported higher sales prices. Both builders and retailers expected further increases over the next three months. Higher food costs and menu prices were noted by restaurant contacts who also anticipated raising menu prices further as food prices continue to rise. Wage pressures increased since the previous survey but remained fairly low. The number of contacts reporting labor shortages remained stable, but contacts reported difficulty in filling a variety of positions including housekeeping, sales, drivers, mechanics, engineers, and skilled workmen.