The following is the text of the Federal Reserve Board’s Tenth District-- Kansas City.
The Tenth District economy expanded further in January and early February, though inclement weather dampened consumer spending. Retailers reported that severe winter storms contributed to limited sales but they expected a rebound in coming months. District manufacturers reported solid growth since the previous survey period and anticipated strong future activity. Little improvement was noted in residential real estate; however, commercial real estate showed further signs of stabilization. District banks reported a decrease in overall loan demand, increased deposits, and stable loan quality. In agriculture, poor growing conditions and tight supplies raised commodity prices. Hiring and production expanded in the energy sector along with drilling activity in key oil and gas liquids fields in the District. Retailers and manufacturers noted added pressure on profit margins from increased materials costs. There was little evidence of wage pressures across District labor markets.
Consumer Spending. Many District retailers reported that unusually severe winter storms limited sales activity in January and early February. Several retail contacts noted temporary layoffs and reduced hours for workers in response to the inclement weather. Overall, sales generally remained at or above year-ago levels and most retailers remained optimistic that sales would increase in coming months. While auto sales softened due to severe winter storms, dealers were satisfied with inventory levels and expected a sharp rebound in sales in the near future. Most tourism contacts reported decreased visitor counts compared with month- and year-ago levels, and respondents indicated severe winter weather as a possible deterrent. However, mountain ski resorts reported strong results due to the heavy winter snowfall. Hotel operators reported that occupancy rates remained flat during the reporting period while room rates continued to decline. Most lodging respondents expected no change in occupancy rates and continued declines in room rates in the coming months.
Manufacturing and Other Business Activity. District manufacturing activity continued to expand, while high-tech services and transportation activity slowed somewhat. Factory production and orders expanded solidly, and backlogs rose moderately. Inventories of both raw and finished goods increased slightly. Many manufacturers hired additional workers and anticipated hiring gains will remain solid in the coming six months. Concerns persisted about rising input costs, but an increasing number of factory operators reported an ability to raise finished goods prices. Planned capital expenditures at factories were up, although most contacts reported adequate capacity. Sales at high-tech firms softened in the latest reporting period, especially those related to federal stimulus spending. High-tech contacts nonetheless noted strength in sales related to data centers and e-commerce. Transportation firms reported weak activity in the current reporting period but remained optimistic that conditions would improve in the coming three months. Several transportation contacts cited rising fuel costs and difficulty finding qualified drivers as possible constraints on future growth.
Real Estate and Construction. Residential real estate activity remained sluggish in January and early February, while the commercial real estate sector showed further signs of stabilization. The residential real estate sector remained hampered by falling transaction volumes and increased inventories of unsold homes. Weak sales of both new and existing homes put further downward pressure on home prices, but real estate agents anticipated a surge in home sales this spring due to seasonal buying patterns. Although housing starts were flat, residential builders remained upbeat and reported a rebound in traffic. Commercial real estate activity stabilized with increased sales and leasing activity, reduced vacancy rates, and increased absorption. Nonetheless, further declines were reported in rents and selling prices and developers’ access to credit remained constrained. Mortgage lenders noted a continued decline in mortgage loan demand and refinance activity due to rising mortgage interest rates. In addition, mortgage lenders noted a decrease in average loan size and higher average down payments.
Banking. Bankers reported weaker loan demand, increased deposits, and an improved outlook for loan quality in the recent reporting period. Overall loan demand decreased slightly as demand for commercial and industrial loans, residential real estate loans, and consumer installment loans decreased while commercial real estate loan demand edged up. For the fourth straight survey, credit standards remained unchanged in all major loan categories. Loan quality was mostly unchanged from the previous period, while the outlook for loan quality over the next six months improved. Bankers reported increased deposits with gains in transaction and money market accounts.
Energy. The energy sector expanded further in January and February as oil and gas firms reported increased hiring and production. Natural gas production remained strong despite high inventory levels and only modest seasonal gains in natural gas prices. Exploration in the District shifted further toward crude oil and natural gas liquids, particularly in New Mexico and the Niobrara oil shale formation in Colorado and Wyoming. Producers anticipated continued soft natural gas prices and steady crude oil prices in the next three months, despite concerns over international instability. A number of energy contacts cited continued competitive pressures for drilling equipment and workers as constraints on future drilling activity, but access to capital was viewed as adequate. Wyoming coal production remained well above year-ago levels. Higher corn prices trimmed ethanol profits in recent weeks.
Agriculture. Poor growing conditions and tight supplies lifted commodity prices and farm incomes since the previous survey period. While winter wheat crop conditions deteriorated due to dry, cold weather, recent snowfall eased drought conditions in the southern Plains. Heavy snowfall also limited grazing and prompted some supplemental cattle feeding. Tight global supplies supported high crop prices, boosting farm income. Cattle and hog prices strengthened with higher demand, but rising feed costs limited profits. Operating loan demand weakened as farmers used cash to pre-pay for crop inputs. Capital spending rose briskly. District contacts reported collateral requirements held steady and ample funds were available for farm loans at historically low interest rates. Farmland prices surged with rising farm income and robust demand for farmland, with the strongest gains reported in Nebraska and Kansas.
Wages and Prices. Input prices continued to increase in many industries, but selling prices and wages generally remained steady. Contacts expected sustained increases in input prices, and most expected higher selling prices in coming months. Manufacturers reported persistent increases in raw materials prices and anticipated the upward trend to continue. Increasing commodity prices put upward pressure on food costs, particularly livestock products. Restaurants reported tighter margins as menu prices remained flat in the face of rising food costs; an uptick in fuel costs contributed to rising building materials prices. Firms reported little evidence of wage pressures across the District and anticipated little to no wage pressure in the near future. A limited number of firms expected to hire seasonal workers in the next three months, but few have considered wage increases to attract qualified candidates.