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Federal Reserve Districts

Tenth District--Kansas City

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The Tenth District economy expanded solidly in June and early July. Non-automotive retail sales posted further gains, auto sales improved sharply, and labor markets continued to firm. Manufacturing activity also grew moderately, and commercial real estate activity improved. In addition, energy activity remained strong, and agricultural conditions were positive. Residential construction edged down, but housing activity remained solid overall. Price pressures eased slightly at both the wholesale and retail levels, while wage pressures remained moderate.

Consumer Spending
Consumer spending in the district continued to increase in June and early July. Most retailers, mall managers, and restaurants reported solid year-over-year increases in activity, with sales generally at or above plan. Sales of electronics, appliances, and outdoor furniture were characterized as strong, while sales of home improvement items, hardware, and indoor furnishings were said to be weak at some stores. Many stores reduced inventories since the last survey, and most managers were satisfied with current stock levels. Nearly all store managers were optimistic about future sales. Auto dealers reported strong vehicle sales since the last survey, driven largely by new price discounts from manufacturers. The increased activity pushed sales above year-ago levels at many dealerships. The strongest sales were reported for new trucks and fuel efficient cars, while sales of used vehicles and large SUVs were characterized as weak by some dealers. Most dealers expect sales to remain strong in the months ahead. Travel and tourism activity in the district increased strongly in June and early July. Most hotels reported occupancy rates were up from both the previous survey and a year ago, and nearly all tourism contacts expect further increases in activity in coming months.

District manufacturing activity expanded moderately in June and early July. Many plant managers reported increases in production, shipments, and orders since the previous survey, and some firms added workers and hours. Growth in capital spending remained strong at most plants. Plant managers said materials were generally available, although petroleum-based materials were reported to be scarce in some areas. Expectations for future factory activity remained solid, and many plants plan further additions to their workforces.

Real Estate and Construction
Housing activity remained solid in June and early July despite some easing in construction, and commercial real estate activity improved further. Most builders reported that housing starts edged down and were slightly below year-ago levels. However, new home construction was still generally characterized as strong. Builders reported few difficulties obtaining materials and most do not expect problems heading forward. Home starts are expected to remain steady in the months ahead. Real estate agents reported home sales increased slightly from both the previous survey and a year ago. Home prices were up moderately from a year ago in most cities. Real estate agents expect home sales to continue to rise in coming months, while home prices are expected to level off in some cities. In a few cities, purchases of homes for investment purposes were reported to be putting downward pressure on home rental rates. Mortgage lenders reported an increase in demand for both new home purchase loans and refinancings since the previous survey, and they expect demand for new home mortgages to rise further. Commercial real estate activity in the district improved further in June and early July. Vacancy rates edged down in several markets, and prices for office space were up moderately in some cities. Some commercial real estate agents expect activity to continue to increase in the months ahead.

Bankers report that loans and deposits both increased slightly since the last survey, leaving loan-deposit ratios unchanged. Demand rose moderately for commercial and industrial loans and edged up for home mortgages, residential construction loans, and commercial real estate loans. Demand for consumer loans was unchanged. On the deposit side, all types of accounts increased slightly. All respondents increased their prime lending rates since the last survey, and almost all respondents raised their consumer lending rates. Lending standards were generally unchanged.

District energy activity remained strong in June and early July. The count of active oil and gas drilling rigs in the region was basically unchanged from both the previous survey and a year ago. Several contacts continued to cite constraints on drilling due to rig shortages and regulatory factors. In order to increase drilling heading forward, some rig operators in the district placed orders for new rigs to be delivered later this year, including some that are being shipped from China. One large rig operator also plans to begin producing some of its own rigs. In addition, a few energy firms are proposing to test new drilling techniques in Wyoming next winter designed to reduce impacts on the environment.

Agricultural conditions remained generally positive in June and early July. With the winter wheat harvest nearly complete, overall yields were slightly better than a year ago. Corn and soybean crops were also reported to be in good to excellent condition across the district. On the negative side, some contacts said higher energy prices were boosting irrigation costs. In the livestock market, a seasonal rise in U.S. cattle supplies and the announced resumption of live cattle imports from Canada have placed some downward pressure on cattle prices.

Labor Markets and Wages
Labor markets in the district firmed further in June and early July, but wage increases remained moderate. Hiring announcements exceeded layoff announcements by a considerable margin, and several military bases in the district learned they will be adding considerably more personnel than originally announced in May. The percentage of contacts experiencing labor shortages increased somewhat from the previous survey, with most of the shortages reported for either low-skilled or high-skilled workers. In addition, several contacts noted an increase in help-wanted advertisements in their areas. However, the share of firms reporting wage pressures remained moderate, lower than before the last recession but higher than a year ago. Some contacts expect wage pressures to increase slightly in the months ahead.

Price pressures eased somewhat at both the wholesale and retail levels in June and early July. The share of manufacturers reporting materials price increases continued to fall, and most users of steel reported price declines. On the other hand, prices for many petroleum-based products rose. The share of manufacturers raising output prices also fell slightly, and fewer plant managers than in previous surveys expect materials prices and output prices to rise in the months ahead. However, the share of firms planning to raise prices remains relatively high by historical standards. Most builders reported increased costs for materials, especially for plywood, and expect further increases heading forward. Retailers generally reported flat selling prices in June and early July after reporting slight price increases in the previous two surveys. However, a number of stores plan to raise prices on some products in the months ahead.

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Last update: July 27, 2005