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Tenth District--Kansas City

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The Tenth District economy grew modestly since the last survey with expectations of further improvement in the coming months. Consumer sales edged up at retail stores and auto dealerships, and District contacts were hopeful that rising consumer confidence would boost future sales. Residential real estate activity improved slightly, but real estate agents expected expiring tax credits to weigh on the housing rebound. While the commercial real estate market remained stressed, District contacts noted a slight improvement in leasing activity.

Manufacturing activity expanded modestly, transportation activity strengthened, and factory managers expected further production gains. Bankers reported improved expectations for loan quality, and credit standards were generally unchanged. Energy activity expanded further as oil and natural gas production increased. Agricultural conditions improved with higher livestock profits and farmland values. Despite higher input prices, retail prices and wage pressures remained low, and few firms planned to pass through additional costs to consumers.

Consumer Spending
Consumer spending continued to improve, and many contacts expected further gains in retail sales. Spurred by lower prices and promotional advertising, retailers reported a rise in sales led by summer apparel items and lower-priced appliances. Auto dealers reported strong demand for used vehicles, which helped boost auto sales and reduce vehicle inventories. Some contacts felt rising consumer confidence would encourage future auto sales. Restaurant sales declined with fewer diners and a flat average check amount. With the onset of seasonal travel, tourism activity and hotel occupancy rose. Further improvements in the tourism and hotel industries were expected as summer travel picks up.

Real Estate and Construction
Residential real estate activity improved slightly in April and May, while the decline in commercial real estate activity slowed. Lower priced single-family homes sold well in April as buyers rushed to take advantage of tax credits. In contrast, sales of higher-priced homes slowed, contributing to a rise in home inventories. Real estate agents expected home sales to fall in the coming months due to expiring tax credits and weak job growth in some areas of the District. After rising in the last survey period, residential construction activity held steady. Mortgage lending activity rose with new home purchases, and loan refinancing volumes increased with lower mortgage rates. Commercial real estate activity remained weak and below year-ago levels. However, lower rents appeared to slow the rise in vacancy rates and raise absorption rates since the last survey period. District contacts expected leasing activity to rise faster than sales activity for commercial property in the coming months. Commercial construction activity continued to decline due in part to difficulty accessing credit.

Manufacturing and Other Business Activity
Manufacturing activity grew at a modest pace in April and May while transportation firms reported sustained growth. After several months of solid gains, the pace of production moderated at both durable and non-durable goods producing plants. The volume of new orders, order backlogs, and shipments edged down from March levels while finished goods inventories rose slightly. Employment levels were stable and fewer firms planned to increase payrolls. Still, manufacturing activity strengthened compared to a year ago, and more plant managers expected factory production to ramp up in the next six months. Some District manufacturers noted an increase in supplier delivery times, and sales activity in the transportation sector rose further. Most transportation firms anticipated the rebound would continue through the summer. Some companies were having difficulty finding qualified drivers, and a few contacts raised concerns about future capacity constraints. The high-tech industry reported a slight uptick in sales activity, partly due to an increase in government contracts.

Bankers reported steady loan demand, higher deposits, and an improved outlook for loan quality. Overall loan demand was essentially unchanged, following a series of declines over the last year. Demand for commercial and industrial loans was flat, while demand for commercial real estate loans and residential real estate loans increased moderately. Consumer installment loans continued to trend downward. Credit standards were generally unchanged. Slightly more bankers reported an improvement in loan quality from one year ago than reported a deterioration. Also, for the first time since late 2007, respondents expected stable rather than declining loan quality over the next six months. Deposits increased moderately after showing no change in the previous three surveys.

Energy production expanded since the last survey period, and additional gains were expected in the coming months. The number of active drilling rigs in the District rose further, primarily due to expansion in Oklahoma and New Mexico. Some firms reported difficulty finding qualified workers, especially engineers. Crude oil prices were expected to rise due to an uptick in demand from the industrial sector and higher gasoline use for summer travel. Since the last survey, fewer contacts expected further declines in natural gas prices. However, several natural gas producers were concerned that prices would remain low due to excess supply. With increased production and limited demand, supplies at natural gas storage facilities grew at a record pace. Though District coal production slowed in April and May, year-to-date volumes approached 2009 levels.

Agricultural conditions improved since the last survey period. Overall, the winter wheat crop was reported in good condition. However, prolonged cool, wet weather promoted wheat crop diseases, which could reduce yields in some areas of Nebraska, Kansas and Oklahoma. Corn planting was almost complete while soybean planting was slightly behind schedule. Crop prices were little changed since the last survey period, but hog and cattle prices rose significantly with further contractions in supplies. Improved incomes among livestock producers contributed to a rise in District ranchland values. Cropland values also increased with strong farmer demand and nonfarm investor interest. Agricultural lenders reported a slight decline in loan repayment rates, but loan renewals and extensions held steady.

Wages and Prices
Wage and retail price pressures remained low in April and May; however, input prices rose for some District firms. District labor markets improved slightly and contacts generally reported little wage pressure and few problems finding qualified workers. After falling in April and May, retail prices were expected to dip further in the coming months, and builders expected lumber prices to fall from their recent spike. However, materials prices, especially steel, rose sharply for District manufacturers. In addition, transportation companies noted rising fuel costs, and restaurant owners paid higher food prices. Despite rising input costs, most District contacts were reluctant to increase selling prices.

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Last update: June 9, 2010