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

Oct. 10 (Bloomberg) -- The following is the text of the Federal Reserve Board’s Tenth District-- Kansas City.


The Tenth District economy expanded at slightly slower pace in late August and September compared to earlier in the summer. Consumer spending slowed somewhat, manufacturing growth was more subdued, and transportation firms reported flat conditions. Growth in commercial real estate activity slowed marginally, but remained on a positive trend. Residential sales and construction continued to grow at a solid pace. Drought conditions hurt agricultural production, though farm incomes were generally healthy due to higher crop prices and insurance programs. Energy activity remained solid, and bankers noted steady loan demand, better loan quality, and increased deposits. Prices rose moderately, but wage pressures were contained outside of a few skilled positions.

Consumer Spending. Consumer spending slowed modestly and contacts were less optimistic about future sales in the months ahead. Retail sales declined slightly from the previous survey, but remained above year-ago levels. Several contacts cited political uncertainty and rising gasoline prices as key reasons for the slowdown. Expectations for future sales also eased somewhat, while store inventories were largely unchanged. Growth in auto sales was less robust than previous months, and expectations for future sales weakened slightly. However, several auto dealers in Oklahoma noted higher sales due to strong energy activity in their areas. Contacts said sales were strongest for mid-sized family sedans and crossover SUVs, while sales of full-size trucks and SUVs remained weak. Auto inventories increased and most dealers anticipated levels to increase further. Restaurant sales slowed markedly and expectations also fell. Some contacts noted higher food costs, rising gasoline prices, and overall consumer uncertainty as reasons for the decline. Tourist activity edged lower, slightly more than the usual seasonal slowing, and most contacts expected further decreases in the months ahead.

Manufacturing and Other Business Activity. Manufacturing activity in the Tenth District continued to expand, although at a slower pace than in previous months. Factory orders and shipments declined, while future hiring plans generally remained positive. Machinery production fell considerably since the last survey, with some contacts citing European weakness and political uncertainty as key reasons for the slowdown. In contrast, metals and transportation production remained solid. Manufacturers’ capital spending plans moderated somewhat, but firms still indicated overall plans for expansion. Transportation activity was flat, although several firms reported higher shipments of perishable food products and more firms reported an increase in capital spending plans. Expectations for future transportation activity eased slightly from the previous survey. Sales growth among high-tech firms remained somewhat sluggish, with several firms citing political uncertainty as a contributing factor. However, expectations for future activity were more positive, and capital spending plans were generally favorable.

Real Estate and Construction. Solid growth in residential real estate activity continued in late August and September, while expansion of commercial real estate activity slowed somewhat. Housing starts edged higher, and limited availability of workers was reported as an issue for some builders in states with low unemployment rates. Expectations for future homebuilding remained favorable, and building materials were generally available. Despite the improvement in housing starts, sales at construction supply firms were considerably slower, and many businesses were pessimistic about future sales. Home sales continued to grow at a solid pace, though slightly slower than in the previous survey. Residential realtors said mid-range homes sold well, while the luxury home market was still exceedingly slow. Several contacts noted a rise in sales to investors, as higher rental rates have increased profit potential. Expectations for future home sales flattened somewhat, but prices were generally rising and expected to increase further. Mortgage lending activity eased slightly, and one contact noted continued tightening of underwriting guidelines. Growth in commercial real estate activity slowed marginally from the previous survey, but was generally solid overall and most contacts remained optimistic about future months. Vacancy rates continued to fall, but absorption rates flattened out. Office prices and rents were also flat from the previous survey, although some increases were anticipated in coming months.

Banking. In the recent survey period, bankers generally reported steady to stronger loan demand, improved loan quality, and increased deposits. Overall loan demand was favorable as most respondents reported stable demand for commercial real estate and consumer installment loans, while demand for residential real estate and commercial and industrial loans edged slightly higher. Credit standards remained largely unchanged in all major loan categories. The majority of bankers reported improved loan quality compared to a year ago, and nearly all banks expected the outlook for loan quality over the next six months to be the same or better. More institutions reported stronger deposit volume than in the previous survey.

Energy. Energy activity remained solid in late August and September. Contacts continued to report reduced activity related to natural gas exploration, but oil rig counts remained strong and were expected to stay relatively stable. Natural gas prices remained very low, although several contacts anticipated a slight increase in prices due to lower levels of exploration and winter supply concerns. Crude oil prices climbed higher from the previous survey period, which several contacts attributed to continued Middle East conflict concerns. One producer noted an increase in service activity particularly in Wyoming and North Dakota, but contacts reported minimal shortages in equipment and labor.

Agriculture. Drought continued to hurt agricultural conditions across the District. Dry, hot weather accelerated crop maturity, prompting an early corn harvest with below-average yields. The soybean crop was rated in mostly poor condition as harvest began. Winter wheat planting was progressing normally, but low soil moisture could delay emergence. Corn and soybean prices fell seasonally, but concerns about global production underpinned wheat prices. Despite drought conditions, high crop prices and crop insurance payments were expected to boost farm income and more than offset lower livestock profits due to higher feed costs. District bankers indicated ample funds were available for qualified borrowers to meet cash flow needs and finance carry-over debt. Demand for farm loans remained modest amidst a pull-back in capital spending. Farmland values rose further and were expected to remain at high levels.

Wages and Prices. The majority of prices continued to rise moderately with further increases expected, but wage pressures were mostly contained outside of a few skilled positions. Retail prices edged higher, and were anticipated to rise further in coming months. Prices of manufacturing materials continued to increase, although fewer firms planned on raising selling prices. Construction materials prices also moved higher, particularly for oil-related products such as shingles. Transportation firms reported higher input prices, and increased food costs continued to impact profit margins and selling prices for restaurants. Many contacts noted that rising gasoline prices have increased input costs and cut sales volumes. Wage pressures were still generally contained in most industries, although some firms reported continued difficulties in obtaining skilled labor, such as truck drivers, construction workers, software programmers, and engineers.

SOURCE: Federal Reserve Board

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