October 15, 2003 Federal Reserve Districts Tenth District--Kansas City

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The Tenth District economy continued to expand in late August and September. Manufacturing strengthened further, and more firms than in previous surveys reported increased hiring and investment. Retail sales excluding autos rose slightly, housing activity remained strong, and the farm and energy sectors improved. On the other hand, auto sales fell after rising earlier in the summer. Commercial real estate markets also remained weak, although they showed some signs of stabilizing. Wage and price increases were generally modest, but some materials prices rose sharply. Consumer Spending Excluding autos, retail sales in the district continued to edge higher in late August and September and were at or above year-ago levels at most stores. Among product categories, sales of shoes, men's and children's clothing, and most home items were strong, while sales of women's apparel and electronics were somewhat sluggish. Nearly all retailers expect sales to continue to increase slightly, although several managers reported they would not be confident about fourth quarter sales until consumer sentiment improved somewhat. Most stores were satisfied with inventory levels and plan typical seasonal increases to stocks in coming months. In contrast to sales at retail stores, sales of motor vehicles in the district fell somewhat in late August and September after increasing earlier in the summer and were below year-ago levels in most states. Auto sales in Colorado were particularly weak, although dealers there reported a slight pick-up in buyer traffic near the end of September. Most dealers expect new car sales to improve in October. Despite slower auto sales since the previous survey, most dealers reported that inventories of unsold cars remained manageable, due to cautious inventory building in recent months. Several dealers also reported that used car prices have firmed recently, as fewer leased cars have been coming back on the market. Reports on late summer tourism activity at mountain resorts in the district were generally positive, and convention business in Denver was strong. Manufacturing District manufacturing activity increased considerably in late August and September, and managers remain optimistic about future output. Plants generally reported higher levels of capacity utilization than in the previous survey, and the volume of new orders continued to rise. In addition, several firms reported further increases in hours and a modest expansion of employment. Moreover, capital spending rose above year-ago levels, as several firms added new production space and increased their purchases of machinery and IT equipment. On the negative side, contacts in the aircraft manufacturing industry reported that their shipments and orders continued to slide. Several other contacts reported difficulties obtaining steel plate and tubing. Looking ahead, most manufacturers expect continued expansion of production and orders for the remainder of the year, along with modest increases in employment. In line with these expectations for stronger factory activity, firms also anticipate some building of inventories of raw materials in coming months. Real Estate and Construction Residential real estate activity in the district remained strong in late August and September, and commercial real estate markets showed signs of bottoming out. Single-family housing starts maintained a rapid pace in most district cities, although some builders reported a slight easing in activity. Starts of entry-level homes continued to be particularly strong. Most builders expect single-family construction to stay solid for the remainder of the year, provided mortgage rates remain low. Several builders reported difficulty obtaining plywood, but other building materials remained generally available. Home sales were steady in late August and September and above year-ago levels throughout the district. Most realtors expect sales to remain flat for the rest of the year and anticipate only modest increases in home prices. Mortgage lenders reported a sharp drop in refinancing activity. Inquiries about refinancing picked up slightly at the end of September, but lenders generally expect refinancings to continue to slow. Demand for home purchase loans is expected to hold steady. Most commercial real estate markets in the district showed some signs of firming in late August and September after weakening earlier in the summer. Sales of office space increased slightly in some cities, while absorption and vacancy rates were largely unchanged. However, realtors do not expect much improvement in office markets for the foreseeable future, as most markets have at least some excess supply. Banking Bankers report that both loans and deposits increased slightly since the last survey, leaving loan-deposit ratios largely unchanged. Demand edged up for residential construction loans, home equity loans, and consumer loans. Demand for other loan categories was little changed, with increased demand for home purchase mortgages helping offset the slowing in refinancing activity. On the deposit side, gains were widespread across categories. All respondent banks held their prime lending rates steady, and most banks also left their consumer lending rates unchanged. No changes in lending standards were reported. Energy District energy activity continued to expand moderately in late August and September, as energy prices remained relatively high. Although natural gas prices fell slightly in September, they were still 50 percent higher than a year ago and are expected to remain elevated in coming months. The count of active oil and gas drilling rigs in the region continued to edge higher in September and was well above year-ago levels. The increase in activity led to greater demand for skilled rig workers, and energy contacts generally expect drilling activity to remain solid through the winter. Agriculture Agricultural activity in the district improved in late August and September, boosting prospects for farm income this year. Cattle profits made a strong rebound after prices reached an all-time high in early September, and yields on the district's corn harvest were better than a year ago. Also, recent moisture has provided excellent planting and growing conditions for the winter wheat crop in many areas. Farmland values throughout the district remain strong, and bankers report higher repayment rates and lower renewals and extensions in their farm loan portfolios. On the negative side, early yields on the district's soybean crop have been below average due to the effects of this summer's drought, and financial concerns persist for farmers located in areas of prolonged drought. Wages and Prices Wage and price increases were generally modest in late August and September, although some materials prices rose sharply. Labor markets were still quite slack around the district. However, the rate of layoff announcements slowed to a three-year low, and more businesses than in previous surveys said they were increasing their hiring plans. Most firms were offering only cost-of-living increases in wages, while benefit costs continued to rise rapidly. Some retailers reported discounting prices to clear out back-to-school merchandise. Otherwise, retail prices were unchanged and are expected to be flat to slightly higher in coming months. Manufacturers reported some firming in finished goods prices, but they continued to lack the ability to fully pass input cost increases through to customers. Among manufacturing and construction materials, prices for steel, petroleum-based products, and plywood rose considerably. Manufacturers expect some materials prices to continue to rise and anticipate only modest increases in their pricing power. Return to top Minneapolis Dallas