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Federal Reserve Districts

Tenth District - Kansas City

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The Tenth District economy weakened further in July. Manufacturing activity declined, construction and real estate activity slowed, and retail sales were flat. On a positive note, vehicle sales picked up following several months of decline, and the energy sector continued to perform well. In the farm economy, wheat yields in many areas were better than previously expected. District labor markets remained similar to the previous survey, with employers having a much easier time hiring most kinds of workers than earlier in the year. Wage pressures were minimal, and most prices remained steady.

Retail Sales
Retail sales remained flat in July and were down slightly from a year ago. Several contacts reported that while consumers continued to spend, they were becoming much more value-conscious and responding in many cases to large price discounts. Women's casual clothing sold well, while dress clothes and home furnishings experienced a drop in sales volume. Retailers generally trimmed inventories in July and said they were satisfied with current stock levels. Managers expect to increase inventories of school supplies and children's clothing by typical amounts in August in anticipation of back-to-school buying. Motor vehicle sales increased across most of the district in July, following reports of weaker activity in the previous survey. But the stronger activity only pushed auto sales up to around year-ago levels. In many places, the increase in activity came largely from sales of more fuel-efficient or diesel models of cars and trucks, and dealers in those areas planned to increase inventories of those models accordingly. Sales of SUVs and small trucks held steady, keeping dealers satisfied with inventories of those vehicles.

Overall factory activity in the district declined again in July, as the number of firms operating at low levels of capacity utilization continued to rise. The dropoff in activity, however, appeared to be less sharp than in previous surveys. Producers of high-tech equipment were the hardest hit, with sizable layoffs occurring at several firms. In contrast, there were reports that food processing plants enjoyed slight growth in sales for the month. Lead times were down slightly across most industries, with virtually no reports of material availability problems. Cutbacks in production in recent months have helped to reduce inventories, and most plant managers reported they were satisfied with current stocks.

Real Estate and Construction
Real estate and construction activity declined in the district in July. Housing starts dropped in most areas but remained largely unchanged from a year ago. Builders expect a further decline in activity in coming months. Sales of new and existing homes were stable in the district as a whole, but inventories of unsold homes were up considerably from a year ago in many cities. Mortgage demand was flat in July but still well above year-ago levels in most places, due largely to increased refinancing activity this year. Mortgage lenders generally expect a weakening in demand this fall, as refinancing begins to taper off. Commercial construction activity weakened in July and was below year-ago levels in most parts of the district. Office absorption was also down considerably. Vacancy rates increased in most cities, reaching record levels in some submarkets hit hard by dot-com failures and high-tech layoffs. There were also reports of overbuilding of retail space and multi-family units in several markets.

Bankers report that loans edged up and deposits held steady since the last survey, boosting loan-deposit ratios somewhat. Demand increased modestly for all loan categories except consumer loans and construction loans, both of which declined slightly. On the deposit side, increases in NOW accounts and MMDAs were offset by a decline in large CDs and small time deposits. Some respondents attributed these offsetting deposits shifts to the narrowing spread between CD rates and rates on liquid deposit accounts. Others suggested that nervousness about the stock market could be boosting investors' demand for liquid assets. Almost all respondent banks reduced their prime lending rates, and most also decreased their consumer lending rates. None of the respondents expected to adjust these lending rates further in the near term. Lending standards were unchanged.

Energy activity in the district continued to expand in July. Despite recent drops in oil and natural gas prices, the regional count of active drilling rigs was near a 15-year high. Several energy industry contacts expect oil and gas activity to back off their peaks in coming months. Others report that interest in gas exploration remains high and drilling activity would be even higher were it not for the shortage of rig workers.

District winter wheat producers harvested fewer acres and a smaller crop this year, but yields in many areas were better than previously expected. The district corn and soybean crops were generally in good condition, and yield prospects were favorable. Pasture conditions in some areas deteriorated in recent weeks due to dry weather, reducing forage supplies and discouraging ranchers from expanding their herds. Although livestock prices are relatively strong, district bankers expect low crop prices and high fuel and fertilizer costs to hold down farm incomes this year. As a result, bankers are keeping a close watch on their farm loans. Small business activity remained sluggish in most rural parts of the district.

Wages and Prices
District labor markets remained similar to the previous survey, with employers having a much easier time hiring most kinds of workers than earlier in the year. Many laid-off high-tech workers were having a difficult time finding jobs. An exception, according to one source, was webmasters. Worker shortages persisted for nurses, school teachers, oil field workers, and most construction trades. Wage pressures continued to be virtually nonexistent outside of these fields. There were reports that some businesses were looking for ways to scale back benefits, such as free parking and health club memberships, that are no longer necessary to attract and retain workers. Retail prices were steady to slightly down in July, as many stores were trying to reduce inventories. These prices are expected to remain largely unchanged in coming months. Prices for some manufacturing materials edged lower due mainly to declines in energy prices. Purchasing managers generally expect flat prices in coming months. Some builders reported increases in lumber costs, which are expected to continue through the fall.

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Last update: August 8, 2001