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Federal Reserve Districts

Tenth District--Kansas City

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The Tenth District economy grew moderately in late April and May. Manufacturing activity expanded strongly, consumer spending increased, and labor markets continued to firm. Commercial real estate activity edged up, and energy activity rose further. On the negative side, residential construction declined modestly, and drought conditions continued to be a problem in the agricultural sector. Wage pressures increased somewhat, while wholesale and retail price pressures were little changed.

Consumer Spending
Consumer spending expanded moderately in late April and May. Most retail contacts reported that sales were higher than in the prior survey period and above year-ago levels. However, some store managers indicated that inventory levels were too high, and they expect to trim inventories going forward. As in the previous survey, retail contacts were generally optimistic about sales in the next several months. Auto dealers reported that sales in late April and May were mostly unchanged from the previous survey period and remained lower than a year ago. Sales of large SUVs and pickup trucks were characterized as weak by many dealers. Inventory levels were said to be satisfactory at most dealerships, and contacts generally expect sales to increase somewhat in the coming months. Travel and tourism contacts reported activity was mostly unchanged since the previous survey. Passenger counts at District airports were generally flat but remained appreciably higher than a year ago. Most hotel contacts said that occupancy rates were similar to those seen this time last year. For the most part, travel and tourism contacts expect solid activity during the summer season.

Manufacturing activity in the District expanded strongly in late April and May. Production, shipments and new orders increased across the District, and many contacts also reported solid growth in capital spending. Growth in manufacturing activity is expected to remain strong in coming months, but growth in capital spending is expected to slow somewhat. Several contacts noted continued difficulty acquiring steel, but no other materials were reported to be abnormally difficult to obtain.

Real Estate and Construction
Residential construction declined slightly in late April and May, while commercial real estate activity edged up. Home builders reported that starts decreased somewhat since the previous survey, and contacts in most parts of the District expect further declines in the months ahead. Construction materials were generally reported to be available, and no significant problems obtaining materials are anticipated in the coming months. Residential real estate agents in most areas said that home sales decreased slightly since the previous survey, with the high-end market showing the most weakness. Inventories of unsold homes continued to rise in many markets and for the most part were well above year-ago levels. Most contacts expect home sales to hold steady or fall further in the coming months. Home price appreciation remained modest in most areas, and real estate agents expect little growth in home prices going forward. Mortgage lenders reported that demand for home purchase loans was unchanged since the previous survey, while demand for refinancings declined. Some lenders are optimistic about growth in home purchase loans heading forward, but virtually all contacts expect refinancings to continue to decline. Commercial real estate activity improved slightly in late April and May. Vacancy rates declined and rents for commercial space rose slightly from the previous survey period in most markets. Commercial real estate agents expect conditions to continue to improve slightly in the months ahead. Commercial construction remained strong, although there were a few reports that high materials costs were resulting in the scaling down or postponement of some projects.

Bankers reported that both deposits and loans held steady since the last survey, leaving loan-deposit ratios unchanged. Demand rose slightly for commercial real estate loans and construction loans, while demand for home equity loans fell somewhat. On the deposit side, all types of accounts were stable. Nearly all respondents raised their prime lending rates and consumer lending rates since the last survey. Lending standards were unchanged.

Energy activity continued to expand in the District during late April and May. The count of active oil and gas drilling rigs in the region increased slightly since the prior survey period and remained well above year-ago levels. Many contacts continued to report that shortages of equipment and labor were constraining drilling activity. Drilling is expected to expand further in the months ahead. Mining activity also remains strong in the District, and a recently announced railway expansion is expected to ease delays in the transport of coal from Wyoming's Powder River Basin.

Agricultural conditions in the District deteriorated in late April and May as drought conditions intensified. In some areas, winter wheat production is expected to be roughly 50 percent below last year's level. Because of the expected poor crop, wheat prices are the highest they have been in several years. Cattle producers have also been adversely affected by the extended drought, as deteriorating pasture conditions continued to force early placements of cattle into feedlots. Respondents expressed concerns about high fuel and fertilizer costs, as well as the increasing cost of rail transportation.

Labor Markets and Wages
Labor markets continued to firm in late April and May, and wage pressures increased somewhat. Hiring announcements once again outpaced layoff announcements by a sizeable margin. Many of the new jobs announced were in the manufacturing sector. In addition, the job market outlook for recent college graduates across the District was reported to be very favorable. The percentage of contacts reporting labor shortages was similar to the previous survey, but the fraction of firms reporting above-normal wage increases rose somewhat. Among the workers reported to be in short supply were engineers, auto technicians, nurses, oil and gas workers, and skilled manufacturing workers.

Wholesale and retail price pressures generally held steady in late April and May. A slightly higher percentage of manufacturers than in the previous survey reported higher prices for raw materials, including steel and petroleum-based inputs. However, the share of firms reporting higher finished goods prices was little changed and substantially below the share reporting higher materials prices. Also, expectations for future increases in raw materials and finished good prices were about the same as in the previous survey period. Home builders indicated that materials costs were mostly stable, but some builders expect price increases in the months ahead. Both the share of retailers reporting higher prices than a year ago and the share planning price increases in the next several months held steady.

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Last update: June 14, 2006