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 moderately in July and early August with further gains anticipated during the coming months. Strong retail and auto sales fueled consumer spending with positive expectations for future sales. District manufacturing activity picked up, and some plant managers were hiring additional workers. Residential and commercial real estate markets continued to strengthen with an upswing in construction and a rise in sales. District banks reported improved loan quality and stable deposits, but slightly weaker loan demand. Agricultural growing conditions were affected by drought, but lower farm income expectations did not dampen farmland prices. District energy activity remained solid with stronger natural gas exploration offsetting a slight drop in oil drilling. The price of raw materials continued to trend higher, but finished goods prices generally held steady. More contacts commented that difficulty finding qualified labor, particularly in highly skilled fields, was placing modest upward pressure on wages. Most firms reported little or no effect on business activity from sequestration budget cuts, though some manufacturers reported a decline in defense orders and hotels noted fewer government employees were traveling.

Consumer Spending. Consumer spending strengthened in July and early August and was expected to rise further in coming months. District retailers reported higher sales, particularly for large-ticket home goods such as mid-priced appliances and furniture as well as seasonal items and clearance merchandise. However, sales of premium goods such as jewelry and high-end appliances slowed. Auto dealers reported somewhat easier access to credit and a rise in sales that was expected to continue in coming months. Economy cars and used vehicles sold well with strong demand for trucks in rural areas. Restaurant sales increased, as more diners paid higher average check amounts. Tourism activity remained solid through the summer, though gasoline sales were down from year-ago levels. After rising during the last survey period, District hotel owners reported a moderate drop in occupancy despite previous reductions in average room rates. Some hoteliers attributed fewer bookings to less government travel.

Manufacturing and Other Business Activity. Manufacturing activity rose moderately in July and early August while sales at high-tech service firms and transportation firms generally held steady. Following a downturn in June, District factory activity strengthened with increased production, especially for food processing, machinery and metal manufacturers. Some manufacturers noted a drop in orders from defense contractors due to federal spending cuts. Overall, however, the volume of new orders rose in July and was expected to strengthen during the next six months. In addition, a rise in the volume of shipments reduced order backlogs and finished goods inventories held steady. Plant managers indicated modest hiring and capital spending plans with solid expectations for future factory output. After slowing during recent survey periods, transportation activity stabilized, despite an upswing in prices charged. Several trucking firms noted more shipments of refrigerated goods. Sales at high-tech firms dipped during the survey period but were expected to bounce back during the next three months.

Real Estate and Construction. Residential and commercial real estate activity strengthened further in July and early August and was expected to remain robust through the fall. Home starts rose, though some builders were concerned that a shortage of skilled labor could constrain growth. Lot prices were expected to increase with tighter supplies of available sites. Sales at construction supply firms were up and some building materials, particularly drywall and roofing shingles, were in short supply. A rise in home sales supported higher home prices even with an uptick in the number of houses on the market. Residential mortgage lenders reported solid demand for home purchase loans but a sharp drop in refinancing activity that was attributed to higher interest rates. Commercial construction escalated during the survey period and was expected to expand further in the coming months. Commercial real estate prices and rents moved higher as sales activity picked up and vacancy rates trended down. Developers reported little change in access to credit.

Banking. In the recent survey period, bankers reported slightly weaker overall loan demand, improved loan quality, and stable deposit levels. Respondents reported steady demand for commercial real estate, consumer installment loans, and commercial and industrial loans, while demand for residential real estate loans declined. Bankers noted a moderate improvement in loan quality since the last survey period with additional quality improvements expected during the next six months. Credit standards remained unchanged in all major loan categories and respondents reported stable deposits.

Agriculture. Farm income prospects dimmed since the last survey period as drought persisted and crop prices fell. While yields varied, winter wheat production was below average across the District. In some areas without irrigation, dry weather hindered corn development and weakened plants against disease. Much of the District’s corn crop was considered in fair condition although the soybean crop was still rated in mostly good condition. Crop prices fell in August on higher global production estimates. Even with a drop in feed prices, losses continued for most feedlot operators as cattle prices moved lower. In contrast, a rebound in hog prices returned profits to some hog producers. Demand for farm operating loans strengthened with high input costs and reduced farm income. Despite weaker farm income prospects, farmland values continued to set records, with demand for farmland driven in part by high levels of wealth in the farm sector.

Energy. District energy activity remained solid in July and early August and was expected to strengthen somewhat in the coming months. The number of active natural gas rigs in the District edged up, particularly in Wyoming and Colorado, despite further declines in natural gas prices. Natural gas prices, however, were expected to rise seasonally as increased demand for winter heating draws down supplies. In contrast, the number of active oil rigs in the District tapered during August even though oil prices have recently risen. Some District contacts noted a lack of qualified labor and difficulty obtaining financing were constraining drilling activity. Several energy firms were also concerned that government budget cuts due to sequestration could cause further slowdowns in permitting. Wyoming’s coal production through early August remained below year-ago levels. After falling in July, ethanol production rose modestly in early August when corn prices fell.

Wages and Prices. Wage pressures edged up during the survey period, raw materials prices trended higher, and finished goods prices generally held steady. On-going shortages of high-skilled labor in some specialized industries, particularly construction, energy, high-tech and transportation, placed slightly more upward pressure on wages during the survey period. Other firms, primarily in retail, leisure and hospitality industries, were beginning to raise wages to attract salespeople, housekeepers, maintenance and clerical staff. Builders and construction supply companies noted higher prices for construction materials in short supply. Some transportation companies charged more for freight hauling in light of higher input costs. The cost of raw materials for manufacturing rose at a similar pace compared to the previous survey period and most finished goods prices were flat. Despite an ongoing rise in food costs, most restaurant owners were not increasing menu prices. Retailers held selling prices steady and did not anticipate raising prices during the next three months. As occupancy rates fell, hotel operators planned to lower average room rates.

SOURCE: Federal Reserve Board

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