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Federal Reserve Districts

Tenth District--Kansas City

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The Tenth District economy declined at a slower pace in April and May with firmer expectations of improvement going forward. Consumer spending was weak and was expected to remain soft. An uptick in manufacturing orders helped stabilize expectations for future production. Residential real estate activity strengthened with stronger sales and increased building permits. In contrast, commercial real estate market conditions deteriorated, and energy activity declined further. Crop conditions held steady while livestock producers cut herds. Bankers reported a rise in deposits and stable loan demand with no erosion in loan quality. Consumer price and wage pressures remained low. Producer prices declined at a slower pace with some firms noting that higher commodity prices boosted material and fuel costs.

Consumer Spending
Consumer spending remained subdued since the last survey period, and most contacts expected soft consumer sales to persist. Retail sales excluding autos were mostly steady, but still well below year-ago levels. Mall and restaurant contacts reported slower traffic and a reduction in the average amount spent. Store managers noted weak demand for luxury items and home furnishings, while sales of basic apparel and sporting goods edged up. A few contacts indicated that recent gas price increases limited consumer spending. Auto sales, especially for new cars, fell further while credit standards remained tight. Still, demand for used cars was strong, and several dealers anticipated sales would stabilize, reducing inventories. Since the last survey, tourism activity and hotel occupancy rates improved with an uptick in seasonal travel, but were below year ago levels.

Manufacturing and Other Services
Manufacturing activity contracted at a slower pace in April and May, and contacts generally expected conditions to stabilize in the coming months. Production of non-durable goods rose, while output fell at plants producing durable goods, especially machinery and furniture. Several transportation companies also reported lighter shipments of durable goods and retail items. Manufacturing orders and shipments edged up since the last survey period keeping inventories at low levels. After steady declines in previous months, export orders fell at a slower pace in May. Future factory activity was expected to hold steady, and fewer companies anticipated staffing reductions. While capital spending at factories remained weak, transportation companies reported increased investment. After a modest increase in sales, demand for high tech services was expected to strengthen.

Real Estate and Construction
Residential real estate activity improved since the last survey period, while conditions in the commercial real estate market continued to deteriorate. Real estate agents attributed a rise in home sales to typical seasonal patterns along with the availability of low mortgage rates and tax credits for qualified buyers. Home inventory levels were down from a year ago, and sales were expected to strengthen further, especially for lower-priced homes. In contrast, higher-priced home sales remained sluggish. Residential construction activity also ticked up with a seasonal increase in the number of building permits issued and solid demand for remodeling projects. Several contacts commented that their local housing market was stabilizing. Commercial real estate activity weakened further and was expected to remain sluggish. Vacancy rates continued to climb, and rental rates have fallen well below year-ago levels. District contacts reported that difficulty obtaining financing remained a primary reason limiting the development of new commercial construction projects.

Bankers reported more stable loan demand, an increase in deposits, and an unchanged outlook for loan quality since the last survey. Overall loan demand was relatively unchanged after decreasing moderately in the previous survey. Demand for commercial real estate loans continued to fall but at a slower rate than in previous surveys. Also, demand for residential real estate loans rose, demand for consumer installment loans edged up, and demand for commercial and industrial loans was flat following a year of declines. Some banks continued to report tighter credit standards on commercial and industrial loans and commercial real estate loans. However, for the first time in a year and a half, no banks reported tighter standards on residential real estate loans or consumer installment loans. Assessments of current and future loan quality were about the same as in the previous survey. A substantial majority of banks reported increases in deposits, which some banks attributed to continued consumer uncertainty about financial markets.

Energy activity continued to weaken in April and May and was expected to fall further. The number of drilling rigs operating in the District was down sixty percent from its peak last fall. Despite higher crude oil prices, softer gains in natural gas prices failed to spur drilling activity. One contact commented that it was difficult to obtain approval for drilling permits in Wyoming. Several firms indicated the cost or availability of credit was also limiting energy activity. Profit margins at ethanol plants remained narrow. Wind energy activity continued to expand across the District.

District agricultural conditions held steady since the last survey period. Rainfall in Colorado and Kansas improved wheat growing conditions; however, Oklahoma's wheat crop remained stressed due to prolonged drought and a late freeze. Corn planting was nearly complete, and soybean planting was in progress. Global weather concerns underpinned higher crop prices. With high feed costs and weak meat demand triggering losses, livestock producers have significantly reduced herds. Farmland values held steady and remained above year-ago levels. Lower farm income expectations slowed capital spending and eased non-real estate loan demand, despite further reductions in agricultural interest rates.

Wages and Prices
Consumer price pressures eased, and wage pressures remained low due to soft labor markets. Producer prices remained soft, even though higher crude oil prices raised some material and fuel costs. Manufacturers reported a slower decline in raw materials prices since the last survey period, and prices were expected to ease further. In contrast, builders reported higher prices for supplies, especially roofing products. Rising prices for oil and food commodities were noted by contacts in the transportation and restaurant industries. Retail and restaurant prices, however, edged down and were expected to soften further. Few contacts reported difficultly hiring workers, and the majority of firms did not plan to raise wages.

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Last update: June 10, 2009