The following is the text of the Federal Reserve Board’s Tenth District-- Kansas City.
The Tenth District economy expanded moderately in March, and expectations for future activity strengthened. District contacts reported stronger-than-expected consumer spending and anticipated additional gains this spring. Improvements in residential and commercial real estate market conditions exceeded typical seasonal trends with robust sales, higher prices and brisk construction activity. Although District manufacturing activity softened, factory managers projected a rebound in orders, production, and shipments. Bankers reported stable loan demand, improving loan quality, and stronger deposits. Persistent drought hindered winter crop development, while crop insurance payments lessened the demand for operating loans. District contacts expected oil drilling activity to strengthen as seasonal demand supports higher oil and gasoline prices. The prices of raw materials for manufacturing, construction and food services rose, with some pass-through to finished goods prices. Though more companies anticipated hiring additional workers in the coming months, wage pressures remained subdued except for specialized positions at transportation, high-tech, energy and construction firms.
Consumer spending was stronger than expected in March and was expected to strengthen further in the coming months. After falling during the last survey period, District retailers reported modest, but stronger-than-expected sales in March and positive expectations for future sales growth. Lower-priced items such as apparel and hardware sold well, while demand for higher-priced premium and custom goods remained weak. Some store owners noted that the payroll tax increase and cold weather during March limited sales growth. Auto sales bounced back in March, and most dealers were optimistic that sales would rise further during the next few months. Smaller cars and used vehicles continued to sell well, while dealers reported slower demand for larger cars, trucks and sport-utility vehicles. Tourism contacts reported a rise in visitor counts compared to the last survey and expected a seasonal increase in tourism spending with warmer weather. District hoteliers indicated that occupancy rates rose with a slight drop in average room rental rates. Restaurant owners reported solid sales and slightly higher average check amounts.
Real Estate and Construction.
Residential real estate activity rose sharply in March, and commercial real estate activity strengthened. In addition to a seasonal rise in home sales during the spring, real estate agents commented that pent-up buyer demand, an improving economy and low interest rates were driving stronger sales. Low- and mid-priced homes in good condition continued to sell quickly, and some real estate contacts noted increased demand for investment properties. Brisk sales and lower home inventories spurred further home price increases. Residential mortgage lenders reported a jump in loan applications for home purchases, and some real estate contacts were concerned that appraisals were not reflecting current market conditions amid rapid price increases. Housing starts were up sharply from the previous survey, but some builders noted that a lack of available sub- contractors could constrain construction in the coming months. Sales at construction supply firms rose with increased building activity.
Commercial real estate markets improved, and District contacts expected additional strength in coming months. New commercial construction edged up and was expected to gain momentum as vacancy rates trended down and rents moved higher. Commercial sales activity and real estate prices rose well above year-ago levels. Developers reported no change in access to credit.
Manufacturing and Other Business Activity.
After softening in March, District manufacturing activity was expected to rebound in the coming months, and sales at transportation and high-tech service firms improved during the survey period. District manufacturing activity remained slightly below year-ago levels driven by weaker durable goods production, particularly for machinery and fabricated metal products. In contrast, non-durable goods production rose modestly with an uptick in food and chemical processing. After falling during the last survey period, the volume of new orders and shipments stabilized in March and was expected to strengthen during the next six months. Export orders, however, remained weak. Looking ahead, more plant managers planned to add workers and increase work hours to handle an expected rise in production. Some District factories and transportation firms were also making capital investments. Trucking traffic picked up, but qualified drivers were still in short supply. Business activity at high- tech firms expanded further, and sales were expected to remain strong. Some high-tech companies reported difficulty finding software developers and experienced IT technicians.
In the recent survey period, bankers generally reported stable loan demand, improving loan quality, and stronger deposits. Bankers reported steady demand for commercial and industrial loans, residential and commercial real estate loans, and consumer installment loans. Although residential real estate loan demand increased for purchases, bankers noted fewer loans for home refinancing. Bankers reported that interest rates trended lower on commercial and industrial loans. A majority of bankers reported improved loan quality compared to a year ago, and they expected further improvements during the next six months. Credit standards remained largely unchanged in all major loan categories, and respondents reported stronger deposit growth.
Agricultural growing conditions remained poor in most of the District. March precipitation provided little relief to persistent drought, and the winter wheat crop was still in fair to poor condition. Despite recent declines, crop prices remained elevated due to short crop supplies, and District farmers did not plan to significantly alter their current crop mix. Livestock operators continued to post losses with falling cattle and hog prices and high feed costs. Pork exports remained weak, but beef exports edged up, partly due to less restricted trade with Japan. Operating loan demand remained soft as crop insurance payments bolstered farm income. Farmland values rose further and were expected to stay elevated.
In the energy sector, District activity remained solid and was expected to strengthen slightly heading into summer. An upswing in oil prices and an anticipated seasonal rise in demand kept the number of active oil rigs in the District above year- ago levels. Even though colder than usual temperatures reduced natural gas inventories and boosted prices, the effect was expected to be temporary and the number of active natural gas rigs in the District dipped during March. Looking ahead, some District contacts were concerned that permitting delays could constrain oil and gas exploration. Wyoming’s coal production remained well below year-ago levels as more electricity was being generated from natural gas. District ethanol production held steady, but profit margins improved recently due to lower corn prices.
Wages and Prices.
Wage pressures remained relatively subdued during the survey period, raw materials prices climbed, and some finished goods prices rose. More firms indicated they would be adding staff in the coming months to handle an anticipated increase in business activity, but most were not planning to raise wages. However, some companies, particularly those recruiting workers with specialized skills such as engineers, software developers, and commercial truck drivers, were increasing salaries. The cost of raw materials for manufacturing remained elevated, and some firms were raising finished goods prices. Some construction supply companies reported passing along higher prices for building materials, particularly lumber, to customers. Retail prices edged up, and retailers expected prices to trend higher during the next few months. Restaurant owners planned further menu price increases due to rising food costs.
SOURCE: Federal Reserve Board