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 showed modest improvement in January and early February. Retail sales slowed during the beginning of the year, but vehicle sales were improved compared to a year ago. Manufacturing activity was weak among durable goods manufacturers, but non-durable manufacturers saw a slight improvement in activity, and high-tech services activity rose. Residential real estate activity and prices increased, but commercial real estate markets were flat. Bankers reported modest growth in loan demand and improvements in loan quality. Drought continued in the District and agriculture conditions deteriorated further. District energy activity expanded during the survey period. Wage pressures continued to be weak, but there was some evidence of upward pressures on prices.

Consumer Spending.

Overall, consumer spending was weaker in late January and February, but sales were expected to improve over the next three months. Retail sales decreased since the last survey period, and retailers expected flat growth during the next three months. Store owners noted that low priced items and clothing sold well during the survey period, but sales of high end items remained slow. Auto sales were unchanged compared to the last survey period but continued to be higher than a year ago. Inventories increased, but dealers were satisfied with the overall levels. Automobile sales expectations improved for the near term. Hotel occupancy rates and tourist activity were unchanged and neither expected a change in activity in the coming months. Restaurant sales were also flat. Sales growth in the future was expected to increase moderately, but was constrained by higher food costs.

Manufacturing and Other Business Activity.

District manufacturing activity weakened since the last survey period. Production activity declined at most durable goods manufacturers, but some improvements were seen in the non- durable goods sector, especially by chemical producers. Employment and new orders for exports fell compared to the previous survey period. Factory managers continued to be moderately optimistic about future activity. Production, new orders, and shipments were all expected to grow over the next few months. Manufacturers also reported that they expected employment levels to increase, but contacts continued to be concerned about tax and regulatory policies. High-tech service firms reported an increase in activity and expected strong growth during the next three months. Some contacts reported difficulty finding skilled engineers and developers. Transportation services activity was flat compared to the previous survey period and a year ago. Expectations for future transportation activity and sales were very strong, and contacts reported difficulty finding qualified workers, especially over- the-road drivers.

Real Estate and Construction.

Residential real estate showed brisk improvement since the last survey period, but commercial real estate activity was flat. Strong residential real estate sales continued to push prices higher and to decrease the stock of residential inventory. Real estate contacts noted that mid-to-low-priced homes continued to be the strongest sellers, and that the high- end market remained slow. Expectations for future housing activity were high due to traditional increases during the spring and summer months. Contacts also cited continued low borrowing rates and improved overall confidence in the economy as reasons for optimism. Sales at construction supply firms were flat, but respondents indicated that future activity is expected to be robust. New home starts were unchanged during the survey period, but are expected to increase over the next three months. Commercial real estate sales, prices, rents and vacancy rates were all unchanged since the last survey period. However, new construction was much improved compared to a year ago and contacts expected new construction to continue to improve in the coming months.

Banking.

Bankers generally reported steady or modest loan demand, improving loan quality, and little change in total deposits in the recent survey period. Most bankers described their overall loan demand as the same as in the last survey, with a few bankers reporting moderately stronger demand. Respondents, on average, reported stable demand for commercial and industrial loans, residential real estate loans, and consumer installment loans, with some strengthening in demand for commercial real estate loans. Interest rates on commercial and industrial loans continued to show moderate declines. Most bankers reported improved loan quality compared to a year ago, and they also expected the outlook for loan quality to either improve or remain about the same over the next six months. Credit standards remained largely unchanged in all loan categories and respondents reported total deposits as experiencing little change since last month.

Agriculture.

Agricultural growing conditions deteriorated further with persistent drought. Most of the winter wheat crop was in fair to poor condition with low soil moisture. While still higher than year-ago levels, crop prices edged down since the last survey period with softer export demand and slower ethanol production. Fed cattle prices held relatively steady, though feeder cattle prices rose as continued herd liquidations trimmed already low cow inventories. Robust demand from both farmers and nonfarm investors pushed farmland values to new highs, particularly for irrigated land due to water scarcity stemming from drought. District bankers reported collateral requirements held steady and ample funds were available for farm loans at historically low interest rates.

Energy.

In the energy sector, activity in the district improved slightly during the survey period and contacts expected further moderate improvement in the coming months. The number of active drilling rigs for both oil and natural gas were flat during the beginning of 2013, but began to edge higher in February. Energy contacts expected oil prices to remain at current levels during the next three months as a result of balanced supply and demand conditions. Natural gas prices were expected to decrease slightly over the next three months due to weaker demand in the spring and healthy supplies in storage. Wyoming coal output continued to fall during January, which some contacts attributed to more demand shifting to natural gas, with gas prices remaining low.

Wages and Prices.

Wage pressures continued to be weak during the survey period, but there was some upward pressure on prices. Firms continued to report changes in health care policy and fiscal uncertainty as reasons for delayed hiring. However, contacts in high-tech services, transportation services and auto dealerships noted they wished to hire, but are unable to find qualified skilled labor. Organizations that serve low- and moderate-income households also noted some improvement in job availability. Prices for raw materials at manufacturing firms continued to move higher, and more manufacturers plan to pass these costs through to finished goods prices over the next six months. Builders and construction supply firms both responded that input prices for construction have increased and that prices are expected to continue to rise over the next three months. Retail prices have also increased recently and retailers expect to raise prices further during the coming months. Increased food costs have pushed restaurant menu prices up recently and restaurant owners expect these costs to remain elevated. Transportation services contacts also reported an increase in input costs both in the current period and over the near term.

SOURCE: Federal Reserve Board

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