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Federal Reserve Districts

Tenth District--Kansas City

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The Tenth District economy expanded modestly in late July and early August. Consumer spending edged up with solid back-to-school shopping and stronger than expected auto sales. Led by durable goods production, District manufacturing activity grew slightly, with expectations for stronger activity over the coming months. Despite solid multi-family building activity, residential and commercial construction remained weak. District drilling activity expanded further in July and August with expectations of a seasonal rise in energy prices heading into the winter. Rising input costs and extreme weather trimmed farm profits, and farm capital spending slowed. District bankers reported further improvements in loan quality amid weaker loan demand, while a flight-to-quality boosted bank deposits. Inflationary pressures softened in the District as fewer retailers and manufacturers expected to raise prices in coming months. Wage pressures were confined to high-skilled positions, despite District unemployment rates well below national levels.

Consumer Spending
Consumer spending rose modestly in late July and early August and was expected to remain solid in the months ahead. District retailers reported higher than expected sales and were somewhat optimistic about future business activity. Apparel and accessory items sold well during the back-to-school shopping season, but demand remained sluggish for large-ticket household items and appliances. Auto dealers reported strong sales, especially for new and used economy cars. Auto sales were expected to increase with the introduction of the new model year, and some dealerships were hiring salespeople and service technicians. Restaurants remained busy as total sales increased despite smaller average check amounts. After improving during the last survey period, travel and tourism activity generally held steady through the summer vacation season. District hotel owners reported increased occupancy at slightly lower average room rates.

Manufacturing and Other Business Activity
Manufacturing and high-tech service activity expanded slightly during the survey period, while transportation activity edged down. Manufacturing activity expanded at durable goods factories, particularly those producing machinery and electronic products, offsetting weakness at non-durable goods plants. The volume of new orders dipped in July, rebounded in August, and was expected to remain solid during the next six months. Shipment volumes held relatively steady, and order backlogs improved with a slight drop in finished goods inventories. With increased activity, durable goods manufacturers hired additional workers, while non-durable goods factories reduced worker hours. After softening earlier in the summer, capital spending was expected to strengthen in coming months. The high-tech industry reported a modest increase in sales, but contacts were concerned that economic uncertainty could dampen demand. Following steady growth during the last few months, activity in the transportation sector dipped below expectations, and firms remained concerned about high fuel costs and a shortage of qualified drivers.

Real Estate and Construction
Residential and commercial real estate activity remained weak in late July and early August. Increased buyer traffic and declining home prices did not spur significantly more residential sales, and existing home inventories rose further. Several real estate contacts thought that economic uncertainty was limiting potential home buyer purchases despite low mortgage rates and reduced home prices. Residential mortgage lenders reported fewer loans for home purchases but an increase in loan refinancing activity. With more people staying in their current homes, construction supply firms noted solid sales for remodeling projects. After an early summer lull, some residential builders reported an uptick in building starts. With the exception of multi-family building projects, new commercial construction was very limited. Commercial real estate prices declined with weaker sales. Yet, lower commercial rents helped trim vacancy rates at commercial properties. District contacts expected commercial prices, rents and vacancy rates to hold steady in coming months. Developers reported little change in access to credit.

In the recent survey period, bankers reported further improvements in loan quality and increased deposits amid somewhat weaker loan demand. Compared to a year ago, loan quality improved with lower delinquency rates, and bankers expected further improvements during the next six months. Overall loan demand decreased slightly as demand for commercial real estate loans declined, while demand for commercial and industrial loans, residential real estate loans, and consumer installment loans held steady. Credit standards remained largely unchanged in all major loan categories. Deposits increased for the fifth straight survey with a few bankers noting that a flight-to-quality supported increased deposits. Bankers cited a weak and uncertain economic recovery and financial regulation as factors shaping expectations for the rest of the year.

Extreme weather and rising input costs dampened farm income expectations since the last survey period. Drought continued to stress crops in Kansas and accelerated feedlot placements in Oklahoma due to poor pasture conditions. In contrast, most of the corn and soybean crops in Nebraska were in good or better condition with isolated reports of storm damage from high winds and hail. Farm capital spending waned as producers paid higher prices for production inputs such as fuel, fertilizer, and feed. Rising input costs strained profit margins, despite a modest rise in commodity prices. Loan repayment rates eased with weaker farm income. Farmland values rose further, but the pace of appreciation slowed.

Energy activity expanded further in late July and early August, and additional gains were expected in the coming months. The number of active drilling rigs in the District rose solidly as additional oil rigs in Oklahoma and New Mexico more than offset a slight decline in Wyoming. Wyoming producers noted that fewer drilling permits were being issued in the Powder River Basin, and the approval process for additional permits was taking longer. Several contacts reported that future drilling activity could be constrained due to a lack of qualified labor, equipment and supplies, and to a lesser degree, availability of financing. Some firms were offering higher wages to retain and recruit engineers and skilled field operators. Crude oil prices were expected to move higher due to strong global demand, but most producers felt natural gas prices would hold steady until the winter heating season began. District coal production increased in late July and early August, but remained below year-ago levels. Ethanol prices and profits retreated from recent highs as the industry increased production.

Wages and Prices
Inflationary pressures softened during the last survey period as wage pressures remained low and fewer businesses expected to raise prices over the coming months. Most industries did not plan to raise wages, except for a few skilled positions, such as engineers, software developers, mechanics, and truck drivers. After rising modestly during the past survey period, fewer retailers expected to raise selling prices over the next three months. Restaurateurs, however, expected further increases in menu prices due to rising food costs. Fewer manufacturers reported price increases for raw materials, and most did not plan to pass on higher costs to finished goods prices. Builders and construction supply companies noted prices for construction materials generally held steady, with the exception of higher prices for petroleum-based products such as roofing shingles and asphalt. Transportation companies continued to pay high fuel prices, and some were considering raising rates.

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Last update: September 7, 2011