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

July 18, 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 moderately in June. Consumer spending was stronger than expected due to stronger automobile sales and a solid start to summer tourism. Commercial and residential real estate prices rose with stronger sales, and District contacts were optimistic regarding future sales and construction activity. Led by mortgage loan activity, some District banks reported improvements in loan demand and quality. District manufacturing activity edged up and additional gains in production, orders, and capital spending were expected in the coming months. Expanding drought conditions hindered crop development and drove crop prices higher. District oil and natural gas drilling activity held at peak levels but was expected to ease with lower global demand. The price of raw materials for manufacturing rose at a slower pace compared to previous surveys and finished goods prices generally held steady. Wage pressures were subdued except for positions in transportation, high-tech and energy industries.

Consumer Spending. Consumer spending improved with stronger than expected sales in June and was expected to strengthen further in the coming months. District retailers reported increased sales, particularly for seasonal items, mid-priced appliances, apparel, and fashion accessories. Several high-end retailers, however, commented that economic uncertainty had slowed demand for luxury items. Auto sales climbed sharply and were expected to remain solid for the next few months with more dealers offering sales incentives and discounts. Fuel-efficient cars sold well, while demand for large, expensive cars and trucks remained weak. Restaurant sales increased more than expected as both the number of diners and average check amounts edged up in June. Tourism activity ramped up with the start of the summer vacation season, though wildfires in Colorado hurt traffic in the Rocky Mountain region. District hotel owners reported a sharp rise in occupancy at higher average room rates and expected bookings to remain strong during the next three months.

Manufacturing and Other Business Activity. Manufacturing and transportation activity edged up in June and sales at high-tech service firms rose modestly. Following a moderate rebound in May, District factory activity edged higher in June and remained well above year-ago levels, with stronger production at food processing and aircraft manufacturers. The volume of new orders fell in June but was expected to rebound and provide a moderate boost to production during the next six months. A rise in the volume of shipments reduced order backlogs and trimmed finished goods inventories. Capital spending held steady, but fewer plant managers were hiring as the average work week declined. Most manufacturers indicated that the economic situation in Europe indirectly affected business activity by increasing the uncertainty surrounding global economic conditions and future demand. After easing in the last survey period, transportation activity picked up, particularly in the trucking industry. A modest rise in sales at high-tech firms fell short of expectations but several companies anticipated stronger sales in the months ahead.

Real Estate and Construction. Stronger residential home sales reduced home inventories and commercial construction activity grew in June. A sharp increase in home sales reduced home inventories, particularly for low- and mid-priced houses. Stronger sales supported a moderate increase in home prices and real estate contacts expected additional sales and price gains during the next three months. Residential mortgage lenders saw an upswing in loan applications for home purchases while home loan refinancing activity was stable. Sales at construction supply firms remained solid and some building materials were in short supply. Builders, however, reported a lull in new home starts following the spring construction rush, but building activity was expected to pick up during the next three months. After climbing during the last survey period, new commercial construction edged up and was expected to rise further with more projects in the planning stages. Commercial real estate prices firmed with stronger sales activity, and real estate contacts noted owners were making fewer concessions to facilitate deals. Commercial real estate rents rose as vacancy rates fell further. Developers reported little change in access to credit.

Banking. In the recent survey period, some District bankers reported modest improvements in loan demand and loan quality with little change in deposit levels. In general, loan demand rose moderately, led by gains in residential mortgage loans and slight upticks in both commercial real estate and agricultural loan demand. Bankers reported steady commercial and industrial loan activity at slightly lower interest rates and a few bankers reported weaker consumer installment loan demand. Some bankers noted that loan quality improved moderately over the past month with addition quality improvements expected over the next six months. Credit standards remained largely unchanged in all major loan categories and bank deposits held steady.

Agriculture. Agricultural growing conditions deteriorated substantially since the last survey period as drought spread across the District. Extremely hot, dry weather hindered crop development and more than half of the District’s corn and soybean crops were rated in fair or worse condition. Crop prices rose sharply as intensifying drought and few prospects of precipitation cut corn and soybean yield forecasts. The winter wheat harvest was nearly complete with better than expected yields in some regions. To preserve drought-stressed pastures, some cattle ranchers were considering selling feeder calves early, especially with high feeder cattle prices. Losses mounted for feedlot operators as feed costs soared. Rising export demand enticed some hog producers to expand production. Strong farm and nonfarm investor demand drove farmland prices higher.

Energy. District energy activity held at historically high levels in June but was expected to ease in the coming months. The number of active oil and natural gas rigs in the District held steady with a rise in active oil rigs offsetting declines in active natural gas rigs. Some business contacts expected drilling activity to slow with current supplies adequate to satisfy summer demand, especially if economic uncertainty in Europe trims global demand and keeps oil prices below spring highs. In contrast, a few District contacts expected a slight uptick in natural gas prices as hot weather boosted demand for electric power generated by natural gas. Wyoming’s coal production fell further as some electricity production shifted from coal to natural gas. District ethanol production slowed as rising corn prices and lower gasoline prices cut profits at ethanol firms.

Wages and Prices. Wage pressures remained subdued during the survey period, raw materials prices edged up, and finished goods prices generally held steady. Many firms were reluctant to increase wages or hire new staff until economic uncertainty diminishes. Some businesses, however, were offering higher salaries to recruit workers with specialized skills such as engineers, software developers, mechanics, and commercial truck drivers. Some transportation companies charged less for freight hauling in light of reduced fuel costs. The cost of raw materials for manufacturing rose at a slower pace compared to previous survey periods and most finished goods prices remained stable. Retailers held selling prices steady and did not anticipate raising prices during the next three months. Restaurant owners, however, planned to increase menu prices due to high food costs. High occupancy rates prompted hotel operators to raise average room rates. Builders and construction supply companies noted rising prices for some construction materials, particularly drywall and asphalt shingles.


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