The Federal Reserve Board eagle logo links to home page

Beige Book logo links to Beige Book home page for year currently displayed June 13, 2007

Federal Reserve Districts

Tenth District--Kansas City

Skip to content

New York
St. Louis
Kansas City
San Francisco

Full report

The Tenth District economy expanded at a modest pace in May. High energy prices underpinned district energy production, but limited consumer spending, especially for non-essential goods. Manufacturing production strengthened since the first quarter, though higher input costs restrained activity toward the end of the survey period. Residential real estate activity remained weak, but was partially offset by strong commercial construction activity. High crop prices and ample moisture bolstered agricultural conditions. District labor markets continued to expand at a solid pace, while wage pressures remained elevated. Price pressures intensified and contacts expected input, wholesale, and retail prices to increase further in coming months.

Consumer Spending
Consumer spending rose marginally in May after a strong showing in the last survey. Retail sales were up slightly, but below expectations as higher gas prices curtailed mall traffic. Apparel continued to sell well, while jewelry sales were weak. Store inventories were elevated and retailers anticipated slower growth in the months ahead. Auto dealers reported sales were also below expectations and lower than year-ago levels. High gas prices dampened demand for large SUVs and vans, but spurred sales of fuel efficient cars. Dealers, however, remained optimistic about future sales. Travel and tourism activity remained healthy and restaurants reported modest sales growth. Hotel occupancy rates were stable with average room rental rates up from month-ago and year-ago levels.

Manufacturing activity rebounded, although high energy prices slowed activity toward the end of the survey period. Plant managers reported a rise in production, shipments, and new orders, with most industries reporting robust activity. Increased employment and an expanded work week kept order backlogs from building, despite low inventories. Capital spending plans held steady at relatively high levels. Plant managers remained optimistic about near-term output and expected exports to strengthen. However, managers were concerned that high energy prices would strain profit margins further and limit future sales.

Real Estate and Construction
The residential real estate market continued to work off inventories and commercial real estate activity strengthened further. Though still below year-ago levels, residential sales followed seasonal trends with increased sales in most District states. Low to mid-priced homes sold well, while the market for higher priced homes and condominiums remained weak. Strong housing demand was reported in cities with high concentrations of energy-related activity and in resort areas of Colorado. Median sales prices were flat or fell slightly. Stronger sales coupled with flat new home construction led to a reduction in inventory levels from the last survey. Commercial real estate activity expanded in late April and May. Commercial construction was on the upswing with the development of new office, hotel, retail and mixed-use properties across the District. Office vacancy rates continued to trend down and were expected to decline further. Absorption rates were up from the last survey and commercial rents have risen substantially over year-ago levels.

Bankers reported that both loans and deposits were unchanged since the last survey. Strong demand for commercial real estate and consumer installment loans and steady residential real estate loan demand offset easing C&I loan demand. Credit standards were mostly unchanged, although a few contacts reported tightening lending standards to reduce risk exposure in a softer local economic environment. Interest bearing deposits, such as large CDs and money market accounts, rose slightly, while non-interest bearing demand deposits declined. Lending rates held firm, but bankers reported shrinking net interest margins.

Energy activity rose in May, but remained below year-ago levels. High oil and gasoline prices fueled a modest rise in the number of active oil and gas drilling rigs in the District, especially in Oklahoma. The limited availability of skilled labor along with rising equipment and service costs continued to restrain drilling activity. However, drilling activity was expected to increase modestly given higher energy prices. Larger oil and gas royalties boosted land values in Oklahoma. Ethanol production in the District expanded further with high ethanol prices boosting ethanol profits.

District agricultural conditions strengthened further in May. Growing conditions improved with heavy precipitation and easing drought conditions. The winter wheat crop was in good to very good condition, though yields are expected to be hurt in parts of Kansas due to a late spring freeze. Corn planting was almost complete, despite delays in some areas due to heavy rains. Improved pasture conditions and strong seasonal meat demand heading into the grilling season underpinned profits for cattle and pork producers, despite higher feed costs. Contacts anticipated a rise in beef exports to Asian markets now that the United States is considered to have BSE (Mad Cow disease) under control. Farmland values surged with strong crop prices and rising farm incomes, especially in areas near ethanol plants.

Labor Markets and Wages
District labor markets continued to add jobs and wage pressures eased slightly in late April and May. Hiring announcements outpaced planned layoffs with most job gains projected in service industries. Demand for skilled workers remained strong, most notably for engineers. Contacts in the leisure and hospitality industry reported difficulty retaining entry level staff. Business contacts reported that labor shortages were limiting expansion plans and some companies had partnered with vocational schools to offer industry specific training programs. Wage pressures softened after intensifying in the last survey, but were expected to remain elevated compared to a year ago.

Price pressures intensified with high energy and farm commodity prices. Retail contacts reported higher selling prices in May and expected retail price pressures to build in the months ahead. Restaurants also reported raising menu prices in the face of higher food costs. Construction costs were mixed with commercial contractors paying higher prices for steel and copper, while home builders reported that lumber and wood product prices held steady. Manufacturers also reported paying higher prices for material inputs. Some manufacturers noted paying fuel surcharges, and food manufacturers paid higher prices for farm commodities. Plant managers reported higher finished goods prices and expected this upward trend to continue in the months ahead.

Return to topReturn to top

Previous Minneapolis Dallas Next

Home | Monetary Policy | 2007 calendar
Accessibility | Contact Us
Last update: June 13, 2007