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

The following is the text of the Federal Reserve Board’s Tenth District--Kansas City.

The Tenth District economy continued to expand at a moderate pace in July and early August. Retailers and auto dealers reported higher sales and expected increased activity in the months ahead. Manufacturing activity expanded slightly, with additional gains expected over the next six months. Transportation activity grew moderately, while sales in the high-tech services sector declined slightly. Residential and commercial real estate markets continued to improve with increased sales, construction, and prices. Banking contacts reported slightly higher loan demand and improved loan quality. Agricultural conditions deteriorated under extreme drought conditions leading to higher crop prices and strained profit margins for livestock producers. The energy sector held steady as growth in crude oil drilling continued to offset the decrease in drilling for natural gas. Most sectors reported higher input prices, but final goods prices and wage pressures remained stable.

Consumer Spending. Consumer spending continued to increase in July and early August and was expected to rise further over the next three months. Retailers reported higher sales, though gains were a bit less than expected. Home furnishings, clothing and back-to-school items sold well, while sales of high-end jewelry were weaker. Auto sales increased sharply as more incentives were offered and access to credit improved slightly. Demand for small and mid-sized crossovers, SUVs and cars was strong, while demand for larger SUVs and minivans remained weak. Most auto dealers expected sales to strengthen further in the months ahead. Restaurant sales increased, and several contacts expected higher menu prices in coming months in response to rising food costs. After strong gains in June, hotel occupancy fell slightly in July and early August, but average room rates continued to rise. In terms of tourism, the number of visitors at local attractions grew slightly, and modest gains were expected in the months ahead.

Manufacturing and Other Business Activity. Transportation activity continued to grow moderately, manufacturing activity expanded slightly, and sales at high-tech services firms declined slightly. Transportation activity continued to rise, with an increase in sales and backlog activity. Input prices and prices charged for transportation services increased with higher fuel costs. Capital spending plans at transportation firms remained largely unchanged, with firms continuing to expect a modest increase in capital spending in coming months. Manufacturing production and hiring rose modestly, though the volume of new orders, volume of shipments, and backlogs declined since the last survey. Manufacturers expected activity to expand in coming months. Sales at high-tech services firms decreased slightly, and capital spending grew modestly. High-tech contacts expected improved sales in the months ahead and a strong rise in capital spending.

Real Estate and Construction. Residential and commercial real estate activity continued to improve in July and early August, and construction activity strengthened. Residential home sales and prices rose, and home inventories fell. Contacts reported multiple offers on homes and expected continued housing market improvements in coming months. Homes under $300,000 sold particularly well, while homes priced over $500,000 and condos were slow to sell in some markets. Several contacts reported that a large inventory of homes in foreclosure has been held back and could put downward pressure on prices when the homes come onto the market. Builders reported an increase in housing starts and a rise in new home prices as well as improvement in the traffic of potential buyers. Land prices and the cost of building materials rose during the survey period as demand improved. Commercial real estate conditions also improved. Construction and sales of commercial real estate properties rose, real estate prices and rents increased, and vacancy rates continued to fall. Several commercial real estate contacts expected uncertainty surrounding the presidential election to slow activity until late in the year. Developers reported that access to credit remained unchanged.

Banking. In the recent survey period, bankers generally reported slightly stronger loan demand, improving loan quality, and little change in deposits. Overall loan demand improved slightly as most respondents reported stable loan demand for commercial and industrial loans, commercial real estate loans, and consumer installment loans, while demand for residential real estate loans improved. Credit standards remained largely unchanged in all major loan categories, and the majority of respondents reported stable deposits. The majority of bankers reported improved loan quality compared to a year ago, and nearly all banks expected loan quality over the next six months to remain steady or improve.

Agriculture. Agricultural conditions deteriorated as crops withered under extreme drought. The majority of the corn and soybean crops were rated in fair or poor condition, cutting production estimates and sending crop prices to record highs. Drought strained profit margins for livestock producers as feed costs rose and further herd liquidations dampened cattle prices. Escalating production costs were expected to boost farm loan demand in the coming months. Agricultural bankers indicated ample funds were available for farm loans at historically low interest rates. Loan repayment rates were expected to hold near year-ago levels due in large part to crop insurance and higher land lease revenues for mineral rights. While still well above year-ago levels, farmland values rose less rapidly and were expected to hold steady during the rest of the growing season.

Energy. District energy activity remained fairly stable at high levels in July and early August. Drilling activity rose as growth in the number of active crude oil rigs offset declines in natural gas drilling. Most contacts expected drilling activity to slow in coming months due to local and national regulatory obstacles and low natural gas prices. Stable demand growth and ample supply of crude oil were expected to limit further increases in crude oil prices in coming months. Contacts expected the slowdown in natural gas drilling to put upward pressure on natural gas prices over the next three months. Shortages were reported for equipment and labor, particularly for oil and natural gas operators and drilling engineers. Several contacts also reported that the drought has affected drilling operations by limiting water availability needed for hydraulic fracturing.

Wages and Prices. Finished goods prices remained stable despite an increase in raw material prices, and wage pressures remained low. Manufacturers reported higher raw material prices, and finished goods prices remained flat. However, both raw material prices and finished goods prices were expected to increase over the next six months in the manufacturing sector, especially for food manufacturers. Retail prices increased slightly, and additional price increases were expected to remain modest. Restaurant menu prices remained flat, but many contacts expected to raise prices in the months ahead in response to higher food costs. Builders and construction supply firms also reported higher prices, especially for roofing materials, lumber and concrete. Wage pressures remained subdued, and only a few contacts expected to raise wages more than normal to attract or retain workers. However, many firms continued to report some difficulty filling skilled positions including drivers, technicians, engineers, computer programmers, and sales representatives.

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