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Federal Reserve Districts


Tenth District - Kansas City

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The Tenth District economy showed fewer signs of slowing in August than earlier in the summer. Retail sales were flat, the slump in manufacturing appeared to lessen, and residential construction activity edged up. Moreover, energy activity remained strong. An exception to the firming trend was commercial real estate, which deteriorated further. In the farm economy, corn and soybean crops were in good condition in some parts of the district but were hurt by dry weather in other areas. District labor markets were about the same as in the previous survey but less tight than earlier in the year, with most types of workers relatively easy to find. Wage pressures remained generally subdued. Retail prices were stable, but price pressures for manufactured goods increased somewhat.

Retail Sales
Retail sales throughout most of the district were unchanged from July to August and were similar to year-ago levels. Energy-producing areas of the region were an exception, experiencing very strong retail activity. Sales of back-to-school items, including clothing, were about the same as a year ago. Several contacts reported that sales of business attire remained particularly weak. Retailers generally reported a reduction in inventories in August. Looking forward, many managers were nervous about future sales, and several reported efforts to continue trimming inventories. Motor vehicle sales in August were mixed compared with July, but generally weak compared with a year ago. Sales of SUVs and select sports car models were stronger than sales of other vehicles.

Manufacturing
The slump in district manufacturing showed signs of lessening in August, as fewer firms reported year-over-year decreases in production. However, most indicators of factory activity remained weak, and layoffs among high-tech manufacturers continued. In addition, capital expenditures fell further below year-ago levels, suggesting that manufacturers were still taking a wait-and-see attitude toward expansion. Inventories of both raw materials and finished products continued to decline, and most managers expect to trim inventories further in coming months.

Real Estate and Construction
Residential construction activity rebounded somewhat in August, but commercial real estate conditions deteriorated further. Housing starts were up slightly from July in most areas and higher than a year ago throughout the district. The only weakness reported by builders was in the market for luxury homes, where demand has fallen sharply. Builders expect the slightly stronger activity to continue through the fall in most areas. However, rising lot prices are expected to restrain future demand in some cities. Home sales remained solid in much of the district but continued to slow in the markets most affected by the high-tech slump. Mortgage demand expanded in August, and lenders generally expect demand to remain strong in coming months. Commercial construction activity declined slightly from July and was considerably below year-ago levels in most parts of the district. Absorption rates for office space eased further, and vacancy rates continued to rise. The majority of respondents now see evidence of excess supply in their markets, particularly for office space.

Banking
Bankers report that loans and deposits both increased slightly since the last survey, leaving loan-deposit ratios little changed. Demand edged up for commercial and industrial loans and home equity loans and increased moderately for home mortgages. Demand for other major loan categories remained unchanged. On the deposit side, all categories except large CDs increased. All respondent banks reduced their prime lending rates since the last survey, and a substantial number also decreased their consumer lending rates. Most respondents do not expect to adjust these lending rates further in the near term. About half the banks tightened their lending standards, citing such concerns as the slowdown in the overall economy and excess supply in some segments of the real estate market.

Energy
Energy activity in the district remained strong in August despite lower natural gas prices. The region's count of active oil and gas drilling rigs eased somewhat, but only after reaching a 14-year high in July. One district firm reported plans to increase its rig fleet by nearly a third over the next year. However, drilling activity in the district continues to be constrained by a shortage of rig workers.

Agriculture
The condition of the district's corn and soybean crops is mixed. Above average yields are expected in the northern part of the district, but crops in other areas have been hurt by dry weather. Timely rains are needed to improve planting conditions for the winter wheat crop. The dry weather has also hurt district pasture conditions, limiting forage supplies and discouraging district ranchers from expanding their cattle herds. Ranchers continue to post solid profits due to high feeder cattle prices. However, the high cost of feeder cattle and lower finished cattle prices have trimmed feedlot profits. District bankers indicate that small business activity in rural areas has slowed from a year ago.

Wages and Prices
District labor market conditions were about the same as in the previous survey, with most types of workers easier to find than earlier in the year. However, worker shortages continued for nurses, oil and gas field workers, and most construction trades. Some factories in rural areas were also having difficulties attracting laborers. Wage pressures remained generally subdued. Retail prices were flat for most items and are expected to remain unchanged through the fall. Price pressures for finished factory goods increased somewhat in August, as more plants passed cost increases through to customers. Most manufacturing material prices remained moderately above year-ago levels. Plant managers generally expect a flattening of material prices in coming months. Some builders reported increases in lumber and wallboard costs. However, these increases are expected to be temporary.

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Last update: September 19, 2001