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 expanded modestly in November and December. After a strong start to holiday shopping, retail sales remained solid as the holiday season progressed and vehicle sales remained higher than a year ago. Manufacturing activity, while above year-ago levels, eased further, especially in the non-durable goods sector. Although energy activity remained historically high, both oil and natural gas rig counts dropped and District contacts expected further declines in the coming months. Residential and commercial real estate markets strengthened as prices and sales trended up and inventories declined. Bankers also reported strong demand for both residential and commercial real estate loans. Historically high crop prices supported crop sector incomes, and livestock profits improved with an uptick in livestock prices. Wage pressures remained subdued except for the ongoing need to fill specialized positions in energy, high-tech, transportation, and construction industries. Numerous business contacts noted they were delaying hiring plans due to economic uncertainty associated with the fiscal cliff and potential policy changes.

Consumer Spending. Consumer spending edged up in November and December, and sales expectations softened heading into the new year. Retail sales rose since the last survey period but retailers expected less growth after the holiday season. Several store owners noted that lower-priced items and home furnishings sold particularly well while sales of high-end items remained sluggish. Auto sales slowed but remained higher than a year ago and some dealers noted undesirably high inventory levels. Near-term sales expectations also eased but generally remained positive. Hotel traffic fell sharply and occupancy rates were substantially below last year’s levels. Although tourist activity picked up somewhat, visitor counts remained well below a year ago and were not expected to improve in the near-term. Despite slightly better sales and higher selling prices, restaurant owners turned pessimistic about future sales growth as food costs mounted. Numerous contacts pinned their less positive outlook for future growth on uncertainty associated with the fiscal cliff that was inhibiting consumer spending.

Manufacturing and Other Business Activity. Manufacturing activity eased since the last survey period, particularly in the non-durable goods sector. Factory production retreated to year-ago levels after a more pronounced contraction in non-durable goods activity trimmed production over the past month. The relative strength of durable goods activity was supported by the production and sales of electrical equipment, appliances, and components. Manufacturers expected generally stronger activity over the next six months. Factory managers at non-durable goods plants, however, were more optimistic about future activity than their peers at durable goods plants with stronger expectations for production, shipments, and new orders over the next six months. Despite a potential rebound in manufacturing activity, factory employment was not expected to rise, with some manufacturers noting that they were delaying hiring plans because of uncertainty in tax and regulatory policies. High-tech service firms expected robust sales and capital spending over the next three months. With railroad traffic continuing to rise and flat sales expectations at transportation service firms, backlogs and capital spending remained solid.

Real Estate and Construction. Residential and commercial real estate sales accelerated since the last survey period despite some weakness in new residential construction. Persistently strong sales of existing residential homes drove prices higher as home inventories continued to fall. Real estate contacts noted that low- to mid-priced homes continued to sell well. Overall mortgage activity and refinancings remained higher than a year ago although expectations for the coming months edged down. Despite recent strength at construction supply firms, sales deteriorated unexpectedly over the past month due partly to higher selling prices. Builders noted that surging lumber and drywall costs led to fewer housing starts in November and December. Commercial real estate markets also improved substantially since the last survey period. Vacancy rates continued to fall with a notable improvement in sales, absorption, and rents, although some contacts noted that economic uncertainty hindered activity. Rising commercial real estate prices were expected to persist in the coming months, but contacts expected a slower pace of both sales activity and absorptions.

Banking. Bankers, on average, reported stronger loan demand, improved loan quality, and higher deposit levels in the recent survey period. Overall loan demand continued to strengthen, led by demand for residential and commercial real estate loans. Respondents also reported stable loan demand for both commercial and industrial loans and consumer installment loans. Interest rates on commercial and industrial loans continued to edge lower. Most bankers reported improved loan quality compared to a year ago, and they also expected the outlook for loan quality to continue improving over the next six months. Credit standards remained largely unchanged in all major loan categories and respondents also reported generally higher deposit levels since the last survey period.

Agriculture. Drought continued to impact crop conditions and livestock profits improved with higher livestock prices and lower feed costs. District winter wheat conditions remained relatively poor due to persistent drought. The drought also caused water levels on the Mississippi River to fall further, hindering commodity transportation to and from agricultural regions. Still net farm incomes remained high due to historically high crop prices and crop insurance payments. Livestock profit margins also improved over the past six weeks due to a post-harvest decline in crop prices and rising livestock prices. District contacts noted a surge in land sales, sparked by concerns of tax policy changes in the new year.

Energy. District energy activity contracted in November and December and was expected to slow further in the coming months. The number of active oil rigs in the District eased from the previous survey period despite a year-end uptick in crude oil prices. The number of active natural gas rigs declined as high supplies of natural gas in storage kept prices from rising due to winter heating needs. Energy contacts expected steady demand to stabilize oil prices and the current oversupply of natural gas to push prices lower. Wyoming’s coal output dropped in December and annual production fell moderately short of year-ago levels. District ethanol production remained steady and profit margins, while still poor, improved slightly with easing corn prices.

Wages and Prices. Although wage pressures remained subdued during the survey period, raw materials prices rose further and more companies expected to raise finished goods prices in the coming months. Many businesses reported delaying hiring due to uncertainty surrounding the fiscal cliff and health care policy. Yet, some firms were offering wage premiums to fill specialized positions, particularly in the energy, high-tech, transportation, and construction industries. Raw material costs at factories climbed higher, and more factories planned to raise finished goods prices over the next six months. Builders expected higher prices for many construction materials, particularly lumber and drywall, to continue climbing due to tight supplies. After rising during the holiday shopping season, retailers expected retail prices to flatten during the coming months. Restaurant owners planned to increase menu prices due to high food costs. In contrast, fewer bookings led hotel operators to reduce average room rates.

SOURCE: Federal Reserve Board

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