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Federal Reserve Districts


Tenth District--Kansas City

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Summary

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The Tenth District economy expanded at a more modest pace in September than in the previous survey period. Consumer spending slowed, although tourism and travel remained solid. Manufacturing activity expanded at a slower pace and inventory levels fell. Residential real estate activity weakened further, but commercial real estate activity was solid. Energy activity remained strong heading into the winter heating season and agricultural contacts anticipated record farm incomes with high prices and bumper crops. Bankers reported softer loan demand and tightened credit standards amid weaker loan quality. Most price pressures eased slightly. Contacts reported less intense wage pressures and labor market growth has moderated.

Consumer Spending
Consumer spending eased slightly in September though contacts generally expected sales to strengthen as the holiday season approaches. After rising in the last survey period, retail sales leveled off and inventories were relatively stable. Apparel, jewelry, and sporting goods sold well, while sales of home-related items remained weak. Auto dealers reported a modest decline in sales with lower demand for large SUVs and trucks, though sales of fuel efficient cars remained solid. Some auto dealers noted the use of incentive and discount programs and expected such programs to continue. Following a robust summer season, tourism activity was higher than expected. Some resort areas attributed an increase in local tourists to higher gasoline prices that restricted travel. Airport passenger traffic, hotel occupancy rates and average daily hotel room rates remained high compared to last year. Restaurants reported flat sales since the last survey period amid rising input costs.

Manufacturing
Growth in manufacturing activity slowed and factories cut inventory levels. After rebounding further in August, production, shipments, new orders, and exports rose slightly in September, but manufacturers remained optimistic about future activity. Factories cut inventory levels during the month and expected further reductions going forward. Employment levels held steady and the lack of qualified workers remained an issue for some firms. Plant managers reported that financial market conditions have had little impact on capital spending plans. Capital spending remained solid in September and contacts indicated that future spending plans remained in place to meet expected sales growth and to ease capacity constraints.

Real Estate and Construction
Residential real estate activity declined further, while commercial real estate activity remained steady. Home sales weakened in September and were expected to slow further due in part to typical seasonal trends. Realtors reported that home prices were flat to down slightly and inventories of unsold homes rose in most major markets. District contacts reported demand for low to mid-priced homes remained strong, but sales of higher priced homes were weak. Commercial real estate sales activity was steady with a slight uptick in prices. The pace of construction eased slightly and the value of non-residential construction put in place edged down, except in the District's energy producing regions where activity remained robust. Developers reported more stringent credit standards and expected credit availability to remain tight. Office vacancy rates were stable and absorption rates declined compared to the last survey period. Rent values remained higher than year-ago levels and were expected to rise.

Banking
Bankers reported weaker loan demand, tighter credit standards, and a rebound in deposits since the last survey. Demand for residential real estate and C&I loans fell moderately. Commercial real estate loan demand also declined modestly, but demand for consumer installment loans strengthened further. Overall loan quality declined slightly and contacts expected further deterioration over the next six months. As a result, banks tightened credit standards, especially for commercial and residential real estate loans. Some banks cited a weaker outlook for the economy and local real estate markets, while others attributed the tightening of standards to a reduced tolerance for risk. Bank deposits expanded moderately in September on the strength of money market accounts and short-term CDs.

Energy
District energy activity held at relatively high historical levels in September. Energy demand was expected to strengthen with the winter heating season. However, fewer contacts expected to expand drilling activity or workforce levels during the winter. The lack of qualified workers was less of a concern for energy producers in the current survey. More District contacts reported that a lack of equipment and services was constraining drilling activity. District coal production and Power River Basin coal prices strengthened in September. Some ethanol producers idled expansion plans with lower ethanol prices and higher corn prices trimming profits.

Agriculture
Agricultural conditions were favorable as fall harvest activity began. Crop producers were set to harvest a bumper crop this fall, straining existing crop storage capacity. The fall harvest was on schedule with record corn yields projected in many areas for both irrigated and non-irrigated fields. The soybean harvest was underway and winter wheat planting was progressing. Unlike the usual seasonal pattern, crop prices have risen this fall, pushed up by unusually low global crop inventories. Record farm incomes were expected as bumper crops are sold at high prices. Strong export demand continued to support livestock prices and improved pasture conditions aided cattle weight gains. Farm credit conditions strengthened further, fueling investment in farm equipment.

Labor Markets and Wages
District labor markets remained tight in September, although the pace of new job growth slowed and wage pressures eased slightly. Hiring announcements outpaced planned layoffs with most job gains projected in the technology, service, and gaming industries. Demand for skilled workers remained strong, most notably for engineers and mechanical technicians. District contacts in the retail and hospitality industries reported difficulty retaining entry level staff and some were filling positions with temporary workers. Despite labor shortages, wage pressures softened since the last survey, and fewer contacts expected to raise wages in the near future.

Prices
Retail and wholesale price pressures held steady and were expected to ease in coming months. Retailers reported that prices were mostly unchanged in September and most expected selling prices to remain flat. The share of manufacturers reporting higher raw material and finished goods prices held steady and expectations for higher input and output prices softened. Nevertheless, raw material prices remained high with higher prices concentrated in the food sector. Food processors reported paying higher raw material prices and restaurants anticipated raising menu prices in response to higher food and delivery costs.

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Last update: October 17, 2007