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Federal Reserve Districts

Tenth District--Kansas City

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The Tenth District economy continued to expand at a modest pace in late January and February.  Consumer spending was limited by poor weather conditions across the District.  Signs of stabilization in residential real estate activity emerged and commercial construction activity remained solid.  Manufacturing production strengthened and capital investment rose.  Energy production fell slightly below year ago levels. Agricultural conditions improved overall with high crop prices, although livestock profits declined.  District labor markets continued to expand at a solid pace and wage pressures were less intense.  Overall, price pressures held steady and contacts expected prices to remain stable in coming months.

Consumer Spending
Consumer spending was limited in late January and early February partly due to poor weather conditions across the District.  Extreme cold, heavy snowfall and icy conditions limited store traffic, and retail malls reported slower sales compared to last year.  However, retail contacts viewed the slowdown as temporary and anticipated stronger sales in coming months.  Electronics and luxury items continued to sell well while home furnishing and appliance sales were relatively weak.  Auto sales were flat from the last survey with dealers reporting a slight drop in vehicle inventories.  SUV and truck sales continued to strengthen with lower gas prices and inclement weather boosting demand.  Dealers expected sales to improve further over the next few months.  Travel and tourism activity remained solid in late January and early February.  District hotels continued to report high occupancy rates, and airport traffic was stable after weather disruptions over the holidays.  Heavy snowfalls benefited the ski industry and mountain resort areas.  

Manufacturing activity strengthened since the last survey period.  Plant managers reported a sharp rise in production and new orders in February.  The volume of shipments continued to rise, although some contacts reported that poor weather limited sales and shipments.  Lower inventories of finished goods contributed to a surge in order backlogs.  Most industries reported robust activity, led by machinery and high-tech equipment production.  Plant managers expressed more optimism about near-term output than in previous surveys and expected capital expenditures to rise.  Managers expected longer work weeks with some additional hiring to meet production demand.

Real Estate and Construction
Residential real estate activity showed some signs of stabilization in late January and early February, while commercial real estate activity remained solid.  Though residential sales remained below year ago levels, real estate agents reported an uptick in sales since the last survey, primarily for low to moderate priced properties.  Weakness continued in markets for condominium and upper priced homes.  Inventories of homes were still well above year-ago levels but the number of unsold homes dropped slightly from the last survey period.  Home inventories were expected to gradually decline in the months ahead, with a continued drop in construction starts and reports of increased buyer interest.  Home prices were steady in most cities and still well above year ago levels in Albuquerque.  Commercial real estate activity continued at a solid pace.  Absorption of office space increased in most cities, and vacancy rates continued to decline throughout the District.  Office prices and rents increased further, though sales were flat since the last survey.  Commercial real estate contacts expected more new construction in the months ahead.  

Bankers reported that both loans and deposits increased somewhat since the last survey.  Demand for commercial and industrial loans and commercial real estate loans rose, while demand for residential mortgage loans edged down.  On the deposit side, interest bearing deposits such as CDs and money market deposits were slightly higher than in the prior period. Lending rates and lending standards were reportedly unchanged.

Energy activity slowed further, but remained high by historical standards.  The count of active oil and gas drilling rigs in the region fell when compared with the previous survey.  The recent decline was more concentrated in the Rocky Mountain area where weather conditions limited activity. Contacts throughout the District continued to report high costs to drill, equip, and produce wells, although these cost pressures were less intense when compared with previous surveys.  Most contacts anticipated drilling activity to decline, as energy prices remained below year ago levels.  The expansion in District ethanol production was also expected to slow, with high corn prices and crude oil prices below year ago levels.

Agricultural conditions improved overall in late January and early February.  The winter wheat crop was in good condition with early moisture followed by protective snow cover.  Elevated crop prices, mainly for corn, boosted in farm income expectations, and District contacts expected farmers to plant more corn in 2007.  Severe winter weather hurt the cattle industry with some reports of increased livestock deaths.  Cattle producers paid higher feed costs, and some reduced herd size due to lower profits, adverse winter weather, and the lack of forage.  Overall, high crop prices strengthened farm financial conditions as loan repayment rates rose and loan renewals and extensions fell.  Farm balance sheets strengthened as higher crop prices boosted cash rents and land values.

Labor Markets and Wages
Labor markets continued to expand in the District, but wage pressures moderated.  Hiring announcements continued to outpace layoff announcements in the region.  Labor shortages persisted for skilled and specialized workers including engineers, oil field workers, accountants, and sales people.  Some companies reported difficulty retaining workers in minimum wage jobs.  Still, most businesses did not anticipate raising wages in the coming months.  District contacts reported some firms were offering enhanced benefits or incentive-based bonuses rather than higher salaries.

Price pressures remained moderate since the last survey.  Most retail contacts reported a decline in selling prices and expected retail price pressures to remain stable in the months ahead. Builders reported construction material prices held steady, and fewer builders expected material prices to rise in the months ahead.  The share of manufacturers reporting increased materials costs rose slightly as rising farm commodity prices boosted costs for food manufacturers.  The share of factories raising finished goods prices also edged up. However, manufacturers expected input and finished goods prices to remain flat.

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Last update: March 7, 2007