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Federal Reserve Districts

Tenth District--Kansas City

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The Tenth District economy expanded moderately in September with the pace of growth firming since the last survey period. Consumer spending strengthened with stronger retail sales and tourism activity. The expansion in labor markets, energy activity, and commercial real estate activity advanced further. District manufacturing activity was solid despite expanding at a slower pace and residential real estate activity continued to soften. Agricultural conditions improved slightly with recent precipitation. Wage and wholesale price pressures remained contained and retail price pressures were subdued.

Consumer Spending
Consumer spending strengthened in September after growing more slowly in August. District retail contacts reported a rebound in sales and heavier traffic in retail malls. Sales gains were generally broad-based, but contacts suggested some weakness in home furnishings and home improvement items. Retail sales were up from a year ago and retailers expected higher sales in the next three months. Auto dealers reported slower sales growth as fewer incentives were offered. High gas mileage vehicles sold well while truck and SUV sales remained slow. Auto inventories rose in September, but stood at acceptable levels. Auto dealers expected slower auto sales and rising inventories in the months ahead. Travel and tourism activity strengthened in September. District hotels reported solid gains in hotel occupancy rates. Hotel and tourist attraction operators expected activity to improve going forward.

The expansion in district manufacturing activity slowed in September. Plant managers indicated that growth in production, shipments, and new orders slowed since the last survey period, but remained well above year-ago levels. Inventories edged up from August and suppliers to auto manufacturing plants reported slower sales. Still, manufacturers remained optimistic about future sales. Supplier delivery times improved in September. Capital expenditures remained solid as did expectations for future investment.

Real Estate and Construction
The residential real estate market continued to soften while commercial real estate activity expanded. Contacts indicated that home starts, traffic of potential buyers, and home prices were down relative to a year ago. Inventories of existing homes rose and contacts reported that the time-on-market for homes lengthened, despite the increased use of concessions to attract buyers. Home sales were soft in most segments of the housing market, with particular weakness in low to moderately priced housing markets. Builders expected home starts to decline further, due in part to normal seasonal slowing. In contrast, commercial real estate activity expanded. Although commercial building starts fell, vacancies were down and absorption was up. Commercial real estate contacts expected activity to remain firm.

Bankers reported that loans increased somewhat since the last survey, while deposits held steady. Demand for commercial and industrial loans rose slightly, while demand for other loan categories was generally unchanged. Money market deposits and CDs were higher than in the prior period. Lending rates and standards remained basically unchanged. Overall loan quality improved somewhat compared to the same period a year ago, and respondents expected loan quality to improve moderately in coming months.

Energy activity continued to expand in the district in September. Oil and gas drilling rig counts remained above year-ago levels. District contacts expected the expansion in energy activity to continue, but at a slower pace. The availability of qualified labor and equipment remained a concern. Demand for gasoline and oil slowed with the end of the summer driving season. Industry contacts, however, expected natural gas prices to rise this winter.

Agricultural conditions generally improved across the district since the last survey in August. Cooler weather and scattered rain helped to improve soil moisture and pastures conditions, but slowed crop maturation and fall harvest. Elsewhere, windy conditions forced some producers to delay winter wheat plantings or risk erosion. Still, producers remained generally optimistic about field conditions going forward. Despite improved pastures, cattle producers may continue to draw down herds to help pastures recover from drought.

Labor Markets and Wages
Labor markets continued to expand while wage pressures remained contained. District hiring announcements continued to outpace layoff announcements. Most contacts continued to report some type of labor shortage, especially for skilled and specialized workers, including engineers, experienced sales workers, oil and gas workers, and manufacturing workers. Some district contacts indicated shortages of entry level positions. The share of businesses experiencing wage pressures eased somewhat since the last survey. Most businesses expected wage gains to be in line with recent wage increases, but some expected that larger wage increases would be needed to attract and retain specialized workers.

Wholesale price pressures continued to ease and retail price pressures remained subdued. Fewer manufacturers reported rising raw materials prices and fewer also expected price increases in the coming months. Nevertheless, prices for raw materials remained high, especially for materials derived from oil and natural gas. The share of manufacturers reporting higher finished goods prices held steady. Looking forward, the share of firms planning output price increases also held steady. District builders indicated that metals prices continued to rise in September. Most retail contacts indicated that prices were stable relative to recent months. Going forward, most retailers expected selling prices to remain flat or rise only marginally.

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Last update: October 12, 2006