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Federal Reserve Districts

Tenth District - Kansas City

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The Tenth District economy showed some signs of cooling in May but remained generally solid. Retail sales were flat, factory activity edged down from high levels earlier in the year, and residential construction slowed following recent interest rate increases. In contrast, commercial building remained strong and district energy activity increased after holding steady earlier in the year. In the farm economy, low crop prices continued to be a concern. Labor markets remained tight, with wage pressures similar to previous surveys. Prices for manufacturing materials continued to rise, and some firms passed these cost increases through to output prices. Construction material prices increased seasonally, while retail prices were largely unchanged.

Retail Sales
Retail sales remained flat in May and showed little change from a year ago. Home furnishings continued to experience strong sales, while sales slowed for high-end women's clothing. Store inventories were basically unchanged in May. Despite sluggish sales in recent months, managers were quite optimistic about summer retail activity. Motor vehicle sales were also flat in May, as dealers indicated that interest rate increases were restraining automobile sales in some markets. Trucks, however, continued to sell particularly well throughout the district. Dealers were generally optimistic about sales in coming months, although some expressed concerns about the availability of domestic vehicles.

District factory activity edged lower in May, with somewhat fewer firms reporting high levels of capacity utilization. There were more reports of material availability problems than in previous surveys, particularly for steel products and semi-conductors. Lead times increased slightly. Many plants trimmed inventory levels in May, due in part to strong product sales. Most managers expect to continue trimming stocks in the next few months.

Real Estate and Construction
Housing activity has slowed since the previous survey, while commercial construction remains strong. Most home builders reported in May that housing starts were down 10 to 20 percent from last year's record pace, and expectations of future residential building have cooled considerably. Home sales have fallen in much of the district, and inventories of unsold homes have edged up from previously low levels. Mortgage demand was flat in May, and lenders' expectations of future demand have fallen considerably following recent interest rate increases. In contrast to housing, reports suggest continued strength in the nonresidential market, particularly for office buildings. This strong office market is expected to continue through the summer. Builders reported few concerns about material availability in May and do not anticipate problems developing in the summer.

Bankers report that loans edged up and deposits edged down over the past month, slightly boosting loan-deposit ratios. Demand increased modestly for consumer loans, residential construction loans, and commercial real estate loans. On the deposit side, demand deposits, small time deposits, and large CDs all declined slightly. Almost all respondent banks increased their prime rate in the past month, and most raised their consumer lending rates as well. A few banks tightened lending standards, but most left their lending standards unchanged.

After holding steady earlier in the year, district energy activity began to move higher in April and May. The count of active oil and gas rigs in the district has risen more than 10 percent in the past two months. Natural gas prices continued to move upward and now sit 56 percent above year-ago levels, with strong forecasts for summer demand and supply shortages driving expectations for further increases. The price of West Texas intermediate crude oil has returned to $30/bl levels, helping to sustain the resurgence in overall economic activity in several energy-dependent areas of the district.

Unusually warm, dry weather has hurt yield prospects for the district's winter wheat crop, which is nearing harvest. Timely rainfall throughout the growing season will be needed for normal development of the corn and soybean crops. Despite continued weather risks to growing crops, low crop prices remain a concern for the farm economy. District bankers indicate farm loan portfolios remain healthy, however, and relatively few have significantly increased their use of government guarantees of farm loans. Small business activity remains sluggish but steady in many of the district's rural communities.

Wages and Prices
Labor markets in most of the Tenth District remained tight in May. Retailers and manufacturers, however, reported slightly fewer problems finding workers than in previous surveys. Shortages persisted in occupations such as engineering, nursing, information technology, and skilled construction trades. Moreover, summer recreation businesses in the district reported strong competition for seasonal workers, as entry-level service positions remained hard to fill throughout the district. Wage pressures were largely unchanged from previous surveys. Several firms indicated that labor problems were less of a concern recently than price increases for materials. Prices continued to rise for most manufacturing materials, including metals, resins, chemicals, and other petroleum-based products. Further increases in input prices are anticipated. Purchasing managers also reported higher costs due to transportation surcharges. Some manufacturing firms have begun to pass these cost increases through to output prices. Prices for some construction materials rose seasonally, but builders do not anticipate further increases this summer. Retail prices were largely unchanged in May after edging up in recent months, and no significant increases are expected in the near future.

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Last update: June 14, 2000