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Federal Reserve Districts

Tenth District--Kansas City

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The Tenth District economy showed some signs of strengthening in late January and February, despite widespread uncertainty among businesses and consumers. Retail sales posted slight gains, manufacturing activity improved, and energy activity picked up. In addition, residential real estate activity continued at a strong pace. On the negative side, auto sales were weak and commercial real estate remained in a slump. In the farm economy, many ranchers and farmers continued to suffer from the effects of drought. Wage and price pressures remained largely subdued across the District.

Consumer Spending
Retail sales in the District improved slightly in late January and February after a sluggish holiday season. Sales were above year-ago levels at most stores and flat or only slightly lower elsewhere. Many retailers attributed the recent gains to heavy discounting. Among product categories, apparel and electronics sold particularly well, while sales of some types of home furnishings were weak. Most managers were optimistic about future activity after solid Valentine's Day sales and expect some inventory building leading up to the Easter season. Motor vehicle sales were flat after declining at the end of last year but were only slightly below year-ago levels in most areas. Compared with contacts in other industries, auto dealers appeared to be more adversely affected by uncertainty over a possible war with Iraq. Still, most dealers expect solid sales by summer. In the tourism industry, activity at Rocky Mountain ski resorts remained solid after record numbers of visits during the holidays.

District manufacturing activity improved slightly in late January and February after slipping in December. Production, shipments, and new orders at District firms rose back above year-ago levels, and many firms reported small increases in capacity utilization rates. However, new hiring and capital spending remained weak, and inventories of raw materials fell. Firms appeared somewhat apprehensive about activity in the immediate future, but their optimism about production activity later in the year was quite high. Although manufacturing employment is also expected to pick up by the summer, capital spending is not expected to change much from current modest levels.

Real Estate and Construction
Residential real estate activity in the District remained strong in late January and February, although commercial real estate activity weakened further. Single-family housing starts throughout much of the District rose from already high levels. Most of this strengthening continued to be for lower priced homes, but there were also reports of increased construction of midrange homes in some areas. High-end home building, on the other hand, largely remained in a slump. Most builders expect home construction to remain solid in coming months, although builders in some drought-stricken areas were concerned about the effects of new water restrictions on permit applications. Home sales across the District were also solid, though reports were not as uniformly strong for housing starts. In the months ahead, most realtors expect sales to continue at the recent pace. Mortgage demand remained strong throughout much of the District, as refinancing activity continued at high levels. Nearly all recent refinancings have been used to reduce monthly payments-a contrast from previous surveys, when a sizable portion of refinancing activity was for the purpose of taking out cash. Lenders generally expect mortgage demand to stay solid and to possibly increase further in the spring. Commercial real estate activity remained weak across the District, with some markets experiencing even further deterioration. Office vacancy rates rose again in Denver, and commercial construction activity fell in nearly all markets. Absorption and prices of office space were down slightly in most areas, and many landlords were offering rent concessions to keep or attract tenants. Commercial realtors generally do not expect a turnaround in activity any time soon.

Bankers report that loans and deposits both held steady since the last survey, leaving loan-deposit ratios unchanged. Demand increased for home mortgage loans but edged down for consumer loans. Demand for other loan categories was largely unchanged. On the deposit side, small increases in NOW accounts and money market deposit accounts were offset by a slight decline in large CDs. All respondent banks left their prime lending rates unchanged since the last survey, and most banks also held their consumer lending rates steady. Lending standards were unchanged.

District energy activity expanded in late January and February in response to the rise in energy prices that began in mid-December. The count of active oil and gas drilling rigs in the region has risen more than 30 percent since the beginning of the year and is now well above the previous peak reached last summer. Some District contacts expect further increases in natural gas drilling in the Rocky Mountains in coming months, as new pipelines to areas east and to California open in the spring and summer.

Much of the District's farm economy continues to face drought conditions. The region's winter wheat crop has deteriorated since the previous survey, and timely rains will be needed to help develop the crop and renew pastures. Despite the drought, supplies of forage and feedstuffs have been adequate, but ranchers in some areas have been forced to pay a premium. Livestock prices have moved higher in recent months, improving profitability in the industry. Overall, District bankers report few significant problems with their farm loan portfolios. However, some highly leveraged borrowers will need to carry over or restructure their debt.

Wages and Prices
Wage and price pressures remained generally subdued across the District. Labor markets were still very slack, with little evidence of rising wages. Managers reported few problems finding workers, although some retailers and manufacturers expressed difficulties retaining quality hourly employees. The pace of layoff announcements continued to decline from recent peaks last fall. Some retail prices eased due to post-holiday discounting, although jewelry prices edged up due to recent increases in the price of gold. Retailers generally expect little change in prices in the near future. Prices for construction materials were basically flat, but some builders expect lumber and gypsum wallboard prices to increase in coming months. Manufacturers continued to report rising prices of petroleum-based products, and several firms also reported surcharges from suppliers due to increased transportation and insurance costs. At the same time, many manufacturers continued to have difficulties passing cost increases through to customers.

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Last update: March 5, 2003