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 January and early February. Despite a seasonal decline, consumer spending was stronger than expected and retailers anticipated rising sales in coming months. District manufacturing activity rebounded with stronger expectations for production, hiring, and capital spending. Residential and commercial real estate activity improved, and District contacts were optimistic regarding spring sales and construction activity. District banks reported steady loan demand and improved loan quality. Agricultural growing conditions improved with recent precipitation, and farmland values soared with high commodity prices. High crude oil prices fueled a rebound in District drilling activity with further gains expected during the next three months. More contacts reported passing higher raw materials prices through to finished goods prices. Many District contacts planned to hire additional workers during the next quarter. Still, wage pressures remained largely subdued except for specialized positions in high-tech and energy industries.
Consumer Spending. Consumer spending weakened in January and early February but was expected to rebound in the months ahead. District retailers reported a slowdown in sales after the holidays as consumers shopped for bargains. Still, store owners noted sales exceeded expectations by rising above year-ago levels and many remained optimistic that sales would improve in the coming months. Clearance items moved quickly, and appliance sales ticked up while demand for furniture and electronics was weak. Auto dealers reported a post-holiday lull in sales that boosted inventory levels, especially for SUVs and more expensive car models. However, auto dealers expected stronger demand for smaller, fuel efficient cars would spur sales in the coming months. Some dealerships were hiring salespeople and service technicians. Restaurant sales were down from the previous survey but remained higher than year-ago levels and were expected to pick up with warmer weather. Tourism activity slowed after the holidays and below-average snowfall hurt bookings at Colorado ski resorts. District hotel owners, however, reported an uptick in occupancy at slightly higher average room rates and expected business to strengthen further during the next three months.
Manufacturing and Other Business Activity. Manufacturing activity rebounded, and sales at high-tech service firms rose sharply while transportation activity edged down in the survey period. Manufacturing activity expanded at both nondurable and durable goods factories, particularly those producing chemicals, fabricated metals, and aircraft equipment. After falling in late 2011, the volume of new orders and shipments rebounded in January and February and finished goods inventories held steady with increased production. Plant managers expected production, hiring, and capital spending to strengthen during the next six months. The high-tech industry reported a sharp increase in sales, and some contacts were worried about losing future business due to a shortage of specialized labor, particularly software developers. Transportation activity slowed further but was expected to improve in the months ahead. Trucking firms remained concerned about high fuel costs and a lack of qualified drivers.
Real Estate and Construction. Residential and commercial real estate activity picked up in January and early February. Existing home inventories declined as lower prices spurred a modest increase in sales, particularly for low- and mid-priced homes. Real estate contacts expected that a seasonal upswing in sales this spring would stabilize home prices in the coming months. Residential mortgage lenders reported an uptick in loans for home purchases and higher average loan amounts while home loan refinancing activity was expected to slow further. Residential lot prices fell further, and new home starts were on par with year-ago levels. Builders planned to ramp up construction in the coming months and sales rose at building supply firms. New commercial construction increased and was expected to rise further with more projects in the pipeline. Commercial real estate prices and rents dipped during the survey period but were expected to firm as vacancy rates improved. After edging up in January and early February, commercial real estate sales were expected to strengthen further during the next few months. Developers reported little change in access to credit.
Banking. In the recent survey period, bankers reported generally steady loan demand, slight improvements in loan quality, and a modest increase in deposits. Most respondents reported steady loan demand for commercial and industrial loans and commercial real estate loans. However, loan demand was slightly weaker for consumer installment loans and residential real estate loan demand softened with slower home mortgage refinancing activity. Bankers reported that interest rates on commercial and industrial loans declined further. Credit standards remained largely unchanged in all major loan categories, and most respondents reported stable or increased deposits. The majority of bankers reported improved loan quality compared with a year ago, and many bankers expected loan quality to improve further during the next six months.
Agriculture. Agricultural growing conditions fluctuated with precipitation levels. After warm, dry weather in January, recent precipitation kept agricultural growing conditions from deteriorating further. The winter wheat crop remained in fair to good condition. Soil moisture levels were low across the District with western Oklahoma and Kansas experiencing severe drought. Ranchers in the southern Plains continued to liquidate herds due to poor pasture conditions and record high cattle prices. In the northern Plains, the lack of harsh winter weather allowed cattle feedlot operators to reduce feed usage and still maintain livestock growth. District contacts expressed concerns about 2012 profit margins due to rising feed, fuel, and fertilizer costs. Still, a rebound in crop prices fueled additional gains to record high farmland values and more bankers expected farmland prices to move higher in the next few months.
Energy. Energy activity rebounded in January and early February and District contacts expected additional expansion in coming months. After slowing at the start of the year, District drilling rig activity rebounded with higher crude oil prices. Energy contacts, however, noted that a lack of equipment and services and qualified labor were constraints on current drilling activity. District contacts expected crude oil and natural gas prices to hold at current levels and anticipated further expansion in oil drilling activity. Bucking national trends, Wyoming’s coal production rose above year-ago levels in January and early February. Ethanol profits dropped sharply as ethanol prices declined with the year-end expiration of the federal ethanol subsidy.
Wages and Prices. Wage pressures remained low during the survey period, and more contacts reported raising finished goods prices in light of higher raw materials costs. More businesses planned to hire workers during the next three months, and contacts in low- and moderate-income communities reported a slight improvement in job opportunities. However, most firms did not plan to raise wages except for specialized positions, particularly in the hightech and energy fields. After edging up during the past survey period, more retailers expected to raise selling prices over the next three months. Restaurateurs expected further increases in menu prices due to soaring food costs. Hotel operators planned to increase room rates with higher occupancy rates. Manufacturers paid higher prices for raw materials, and more manufacturers planned to pass on higher costs to finished goods prices. Builders and construction supply companies noted rising prices for construction materials, especially drywall and asphalt shingles. Transportation companies paid high fuel prices, and some were raising shipping rates.