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Federal Reserve Districts

Tenth District--Kansas City

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The Tenth District economy continued to experience moderate growth in October and early November. Consumer spending strengthened despite slightly weaker auto sales, and labor markets continued to expand. Commercial real estate activity also increased further, while manufacturing grew modestly. Energy activity fell slightly but was still high by historical standards, and agricultural conditions were generally favorable. Residential real estate activity continued to decline. Wage pressures were generally moderate, while price pressures eased slightly.

Consumer Spending
Consumer spending increased solidly in October and early November, despite a slight easing in auto sales. The share of retail stores reporting increased sales from the previous survey continued to rise following a slowdown in the summer, and recent sales were higher than expected at many stores. Gains were reported across a variety of market segments, with sales of apparel particularly strong. On the other hand, sales of home furnishings remained relatively weak. Contacts generally expected a solid holiday sales season. Auto dealers reported a modest decline in sales from the previous survey, which pushed inventories above desired levels at many dealerships. However, vehicle sales remained above year-ago levels and contacts were generally optimistic about the future. Travel and tourism activity remained strong in October and early November. District hotels continued to report high occupancy rates, and airport traffic was solid. Most hotel and tourist attraction operators expected high levels of activity to persist through the end of the year.

Manufacturing activity in the District expanded modestly in October and early November. Plant managers continued to report slower growth in production, shipments, and new orders than earlier in the year, and order backlogs and finished goods inventories fell for the first time in over a year. Producers of automotive, residential construction, and agricultural equipment reported especially slow sales. On the other hand, manufacturers who supply equipment to the energy, railroad, aircraft, commercial office, and high-tech industries reported strong demand. Plant managers expressed less optimism about near-term output than in previous surveys, and one contact reported a reduction in productivity due to limited skills and motivation among recently-added employees. However, factory activity was still well above year-ago levels, and capital spending plans remained solid.

Real Estate and Construction
Residential real estate activity decreased in October and early November, while commercial real estate activity strengthened further. Builders indicated that home starts continued to drop and were below year-ago levels. Further easing in home construction is expected in the months ahead. Residential real estate agents reported continued declines in home sales, and additional decreases are anticipated. Inventories of existing homes were still well above year-ago levels but largely unchanged from the previous survey. Home inventories were generally expected to begin falling in the months ahead, with the slowdown in construction. Home prices were steady in most cities and still well up from a year ago in Albuquerque and Oklahoma City. Many contacts in Colorado, however, reported moderate price declines and expected further easing in the future. Commercial real estate activity continued to improve. Sales and absorption of office space increased in most cities, and vacancy rates were lower than a year ago throughout the District. As a result, office prices and rents increased further. Most commercial real estate agents anticipated continued strengthening in the months ahead, although a few contacts were concerned about potential over-building of single-story suburban commercial space.

Bankers reported that loans increased somewhat since the last survey, while deposits held steady. Demand for commercial and industrial 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, while demand deposits were lower. Lending rates and lending standards were basically unchanged.

Energy activity declined moderately in October and early November but remained strong by historical standards. The count of active oil and gas drilling rigs in the region fell slightly compared with the previous survey but was still well above year-ago levels. The recent decline was concentrated in the Rocky Mountain area, where contacts reported the cost to drill, equip, and produce wells was becoming prohibitive. One contact also noted that many exploration companies had moved their offshore drilling rigs in the Gulf of Mexico to other parts of the world due to difficulties in obtaining hurricane insurance. Most contacts anticipated steady drilling activity going forward, as energy prices remained relatively high.

Agricultural conditions remained generally favorable in October and early November despite a lack of moisture across much of the District. The corn and soybean harvest was nearly complete, and winter wheat emergence was progressing normally. The unseasonably warm and dry weather aided harvest activities but continued to deplete soil moisture in many vulnerable parts of the District. Higher market prices benefited producers of wheat and corn. Livestock producers, however, faced higher feed costs combined with weak pasture conditions.

Labor Markets and Wages
Labor markets continued to expand in the District, while wage pressures remained moderate. Hiring announcements continued to outpace layoff announcements in the region, and several contacts noted increases in newspaper and radio job advertisements. The majority of businesses reported some type of labor shortage, especially for skilled and specialized workers, including engineers, oil field workers, accountants, welders, sales people, and truck drivers. Given the overall shortage of workers, one contact lowered language standards for new employees. Several contacts said more firms were hiring workers away from other companies, resulting in higher wage expectations. Still, the overall share of businesses experiencing wage pressures remained steady.

Price pressures eased somewhat in October and early November. The share of manufacturers reporting increased materials costs continued to fall, and the share of factories raising finished goods prices also dropped slightly. Builders reported metal prices remained high, but prices for some other construction materials have moderated due to both lower demand and lower transportation costs. More manufacturers than in previous surveys expected prices to rise in the coming months, and builders said any increase in fuel costs would lead to price hikes. Most retail contacts reported flat selling prices and expected little change in prices in the months ahead. However, several restaurants in Colorado planned to raise menu prices to cover expected increases in labor costs resulting from the passage of a new minimum wage law.

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Last update: November 29, 2006