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Tenth District--Kansas City

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The District economy continued to expand in late November and December, despite slower construction activity. Strong consumer spending over the holidays lifted retail sales and expectations for future spending. Manufacturing activity improved amid a rise in new orders and stronger durable goods production, and some plant managers planned to increase capital spending and hire more workers. Residential and commercial construction remained weak, though commercial real estate sales edged up and vacancy rates dipped slightly. District bankers reported stable banking conditions with some improvements in loan quality. Energy activity expanded further, and incomes improved for the agricultural sector. Even though several district contacts expected to increase employment, wage pressures remained subdued. With raw materials prices continuing to climb, more manufacturers expected to pass through higher input costs to finished goods prices; however, most retailers did not plan to raise selling prices in the coming months.

Consumer Spending
Consumer spending improved in late November and December, and many retailers expected further gains in the coming months. Brisk holiday shopping boosted retail sales with some reports of price discounting. Store managers reported that major appliances and household items sold well. Retail sales were expected to edge up further in the next three months. After improving slightly in the last survey, auto dealers reported limited sales, which contributed to larger vehicle inventories. Dealers were optimistic, however, that auto sales would pick up with additional financing incentives and discounts. Restaurant operators reported stronger overall sales despite a continued decline in the average check amount. Tourism activity improved, and Colorado resorts reported a strong start to the winter ski season. District hoteliers reported average occupancy and room rates fell since the last survey but were above year-ago levels.

Manufacturing and Other Business Activity
District manufacturing activity strengthened further since the last survey, and plant managers were increasingly optimistic about future activity. Plant managers reported that production, shipments, and new orders increased in December, led by durable goods manufacturers. During the first half of 2011, manufacturers expected new orders, shipments and production to rise, and finished goods inventories to remain flat. Some factory managers planned to increase employment levels as well as capital spending in the coming months. Stronger demand for computer software and IT consulting contributed to a rise in sales at high-tech firms. Activity in the transportation sector slowed since the last survey period but remained above year-ago levels.

Real Estate and Construction
Residential and commercial construction slowed in late November and December, while commercial real estate sales and vacancy rates improved slightly. There was little new home building activity since the last survey period, and construction supply sales were down. Homebuilders and real estate agents noted reduced buyer traffic and a decline in home sales, especially compared to last year when buyers were motivated by the federal tax credit program. With limited sales activity, home inventory levels were expected to grow over the next three months, accompanied by further reductions in home prices. After rising in the last survey period, mortgage loan activity eased with fewer home purchases and less demand for refinancing. Commercial construction activity slowed and was expected to remain weak over the next three months. District commercial real estate contacts, however, reported an uptick in sales and noted prices generally held steady despite further rent reductions. Vacancy rates dipped and were expected to move lower as absorption rates gradually improved.

In the recent survey period, bankers reported generally stable deposits and loan demand with an improved outlook for loan quality over the next few months. Overall loan demand was stable to slightly weaker. Demand for commercial and industrial loans and commercial real estate loans were little changed while demand for residential real estate loans and consumer installment loans decreased. For the third straight survey, credit standards remained unchanged in all major loan categories. Compared to a year ago, loan quality edged up slightly, and bankers expected loan quality to improve further over the next six months. After rising in the previous survey, bankers reported that deposits held steady.

Agricultural growing conditions deteriorated since the last survey period, but rising crop prices supported farm income gains. Continued dry weather across the Southern Plains intensified drought concerns and could affect winter wheat development, especially in Oklahoma and Kansas. Crop prices rose further at year-end, boosting farm incomes. Strong export demand for beef supported an uptick in cattle prices, but hog prices fell with bigger supplies and softer demand for pork. With rising incomes, farm loan repayment rates improved, farm loan renewals and extensions fell, and farm capital spending remained robust. Even with a modest increase in the number of farms for sale, strong demand pushed farmland values higher.

District energy activity expanded further in early November and December. District contacts reported increased drilling activity, driven by additional oil rigs in Oklahoma. While energy producers expected drilling activity to rise in the coming months, some indicated that a lack of qualified labor and limited availability of equipment and services would constrain future drilling activity. Natural gas prices held steady, with ample supplies offsetting higher demand as the winter heating season began. Crude oil prices rose in late November and December, and contacts expected further price gains with stronger global demand and a weaker value of the dollar. Ethanol prices rose with tighter supplies and a one-year extension of the ethanol blenders' credit and tariff. Higher ethanol prices preserved producer profits despite elevated corn prices.

Wages and Prices
Wages generally held steady even as some firms reported an uptick in hiring, and prices paid for raw materials rose further. Several contacts across a variety of sectors expected to increase employment over the next six to twelve months, including manufacturing, transportation, high-tech, energy, and retail. However, few employers planned to offer higher salaries, and wage pressures were expected to remain low. Firms that were maintaining or reducing staff levels often cited low sales growth and uncertainty over regulatory costs as reasons for not hiring. District manufacturers reported another jump in raw materials prices and expected more increases would follow. Transportation companies, builders, and construction supply firms also expected input prices to rise, especially for fuel and petroleum-based products such as roofing shingles. More plant managers planned to pass higher input costs to finished goods prices, and several transportation and high-tech firms anticipated raising prices in the next three months. In contrast, District contacts in the retail sector noted some price discounting during the holiday sales season, in addition to reduced hotel rates and more incentives offered by auto dealers. Most retailers expected selling prices to hold steady in coming months. Menu prices remained flat at restaurants despite a steep rise in food costs.

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Last update: January 12, 2011