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.

TENTH DISTRICT - KANSAS CITY

The Tenth District economy expanded modestly in October. Stronger retail sales underpinned a rebound in consumer spending that was expected to continue during the upcoming holidays. Commercial and residential construction remained solid, and real estate agents expected real estate prices to rise further with stronger sales. Bankers reported stronger commercial lending activity and additional demand for residential real estate loans. District manufacturing activity slowed, but factory managers expected a moderate rebound in orders, production, and shipments. High feed and fuel costs drove agricultural loan demand higher, and dry conditions hindered winter crop development. District contacts expected natural gas drilling activity to strengthen seasonally with prices during the winter heating months. The prices of raw materials for manufacturing and construction rose, and some finished goods prices edged higher. Wage pressures were subdued except for specialized positions at transportation, high-tech and energy firms. Several business contacts commented that uncertainty regarding political, economic, and tax policies was inhibiting growth, limiting business investment, and delaying hiring plans.

Consumer Spending. Consumer spending rebounded modestly in October and retailers expected further sales gains during the holidays. District retailers reported that sales rose above year-ago levels, although they were generally below expectations. Several store owners noted particularly strong sales for major appliances and seasonal apparel, in addition to an uptick in demand for premium and custom goods, such as fine jewelry. Auto sales held steady after rising in the last survey period, and sales were expected to improve by year’s end. Fuel- efficient cars sold well, while demand for large, expensive cars and trucks remained weak. Tourism contacts reported that visitor counts and tourism spending fell below year-ago levels. Furthermore, hoteliers reduced room rates and noted the fall in hotel occupancy rates was likely to continue in coming months. Restaurant owners reported lower sales revenue and a decline in average check amounts. Some leisure and hospitality contacts attributed the slowdown in sales to high gas prices that limited spending and kept some customers at home.

Manufacturing and Other Business Activity. Although manufacturing activity slowed slightly since the last survey period, sales at transportation and high-tech service firms rebounded. While still above year-ago levels, District manufacturing activity edged lower in October as production of both durable and non-durable goods slowed, most notably at machinery, electronics and food processing plants. In addition, order backlogs fell further and were expected to remain low. The volume of new orders and shipments dropped in October, but were expected to rebound and provide a modest boost to production during the next six months. Capital spending at District factories generally held steady; however, fewer plant managers were hiring and the average work week declined. Trucking traffic picked up, due in part to emergency food shipments to areas affected by Hurricane Sandy. Several transportation firms reported an increase in capital spending and a shortage of qualified truck drivers. After easing in the last survey period, business activity at high-tech firms expanded and sales were expected to strengthen in the months ahead. Several business contacts attributed customer delays in ordering to uncertainty regarding the current political, economic and tax environment.

Real Estate and Construction. Residential real estate activity remained brisk in October, and commercial real estate activity held firm. A solid rise in home sales reduced home inventories further, with real estate agents noting particular buyer interest in foreclosed properties. Low- and mid-priced homes continued to sell well, while the market for luxury homes and condominiums remained weak. Residential mortgage lenders saw loan applications for home purchases rise above year-ago levels and saw an upswing in loan refinancing activity. Stronger sales supported further home price increases for both existing and new homes. Housing starts were up from the previous survey, but were expected to level off with a seasonal slowdown in construction over the winter months. Sales at construction supply firms rebounded, particularly for lumber products. Commercial real estate markets remained stronger than a year ago and District contacts expected additional strength in coming months. New commercial construction edged up and was expected to hold steady. Commercial sales activity and real estate prices remained above year-ago levels with strong expectations through the end of the year. District contacts expected commercial real estate rents to rise as vacancy rates trended lower. Developers, however, were concerned about the size of down payments and reported a slight deterioration in access to credit.

Banking. In the recent survey period, some District bankers reported stronger loan demand, improvements in loan quality and a slight rise in deposit levels. Total loan demand rose moderately, led by gains in demand for real estate loans for both residential and commercial properties. In addition, more bankers reported higher loan demand and lower interest rates for commercial and industrial loans. A few bankers noted continued weakness in consumer installment loan demand. Many bankers reported a moderate improvement in loan quality compared with the last survey with additional quality improvements expected during the next six months. Otherwise, credit standards remained largely unchanged in all major loan categories.

Agriculture. High input costs reduced farm profitability and boosted farm loan demand since the last survey period. Demand for farm operating loans rose as surging feed costs cut livestock operator incomes and crop producers paid higher fuel costs to run irrigation and harvest equipment. With reduced incomes, especially for livestock producers, farm loan renewals and extensions edged up and loan repayment rates eased from recent peaks. Still, bankers reported that sufficient funds were available to meet short-term financing needs. Low soil-moisture levels hindered winter wheat emergence, raising concerns that persistent drought could strain U.S. crop production, keep crop and feed prices high, and force further livestock herd liquidations. Farmland values, however, continued to set new record highs in the District.

Energy. District energy activity fell in October, but was expected to improve heading into the winter heating season. The number of active oil rigs in the District eased from recent highs as oil prices declined. After falling from summer peaks, the number of natural gas rigs held steady since the last survey and some District contacts expected a seasonal uptick in natural gas prices as winter approached. Wyoming’s coal production remained well below year-ago levels as more electricity was being generated from natural gas. District ethanol production edged up, but persistently high corn prices limited profits.

Wages and Prices. Wage pressures remained subdued during the survey period, raw materials prices rose, and some finished goods prices edged up. Many firms were reluctant to increase wages or hire staff amid political and economic uncertainty. Some businesses, however, were offering higher salaries to recruit workers with specialized skills, such as engineers, software developers, and commercial truck drivers. The cost of raw materials for manufacturing continued to climb, and a few firms were raising finished goods prices. Builders and construction supply companies expected further price increases for construction materials due to Hurricane Sandy. Retail prices edged up but were expected to hold steady during the holiday shopping season. Restaurant owners, however, planned to increase menu prices due to high food costs. Low occupancy rates prompted hotel operators to reduce average room rates.

SOURCE: Federal Reserve Board

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