October 27, 2004 Federal Reserve Districts Tenth District--Kansas City

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The Tenth District economy continued to expand in September and early October. Retailers posted steady gains, manufacturing activity increased, and labor markets showed further improvement. Energy activity was very strong, and the housing and agriculture sectors remained solid. On the negative side, commercial real estate was still weak. Wage pressures were generally modest, but some price pressures were evident at the wholesale level and for a few retail goods. Consumer Spending Consumer spending in the district continued to grow in September and early October. Most store and mall managers reported steady year-over-year sales gains following a pick-up in sales growth in the previous survey. Among product categories, home items and men's and children's clothing sold particularly well. Restaurant business was also generally reported as solid. A majority of stores increased inventories since the previous survey, and most store managers were satisfied with current inventory levels. Several managers noted that they planned greater inventory expansion for the holiday season than in recent years, and virtually all managers expect solid improvements in sales up to and including the holiday season. Motor vehicle sales in the district were basically flat compared with previous months and slightly lower than a year ago. Nearly all dealers anticipate stronger sales heading forward, and most dealers were satisfied with current inventory levels. Travel and tourism activity in the district was mixed in September and early October. Hotel occupancies eased somewhat, but airport traffic picked up across the district after falling slightly in the previous survey. Manufacturing District manufacturing activity continued to expand solidly in September and early October. Manufacturers reported that production, shipments, and orders all increased from the previous survey. A large number of firms added employees and increased capital spending, while only a small number of firms reported cutbacks in these areas. Most aircraft manufacturing contacts noted recent improvement, and several contacts in the steel and food industries reported they were operating close to full capacity. Material availability problems were reported by a sizable number of firms, especially users of petroleum-based products and aluminum. Optimism about future production remained high. Many firms plan increases in employment and capital spending in coming months, while only a few plan reductions. Real Estate and Construction Housing activity generally remained solid in September and early October, while commercial real estate was still weak. Single-family housing starts were largely flat compared with mid-summer and with a year ago but were still high by historical standards. Several builders, however, reported a weakening in construction of high-end homes. Most builders expect home starts to slow slightly in the months ahead but to generally remain solid. Building materials other than cement were typically easy to obtain, and builders expect few difficulties obtaining materials heading forward. According to realtors, home sales in most parts of the district eased slightly from recent months and were also down modestly from a year ago. Similarly, mortgage lenders reported a slowdown in mortgage demand, and most realtors and mortgage lenders expect some continued easing in home sales in coming months. Commercial real estate activity in the district was still weak, but contacts were somewhat more upbeat about future activity than in previous surveys. Vacancy and absorption rates remained flat in most cities, while sales and leasing activity increased moderately. Over the next six months, about half of the commercial realtors contacted expect some improvement in vacancy and absorption rates. Banking Bankers report that both loans and deposits increased slightly since the last survey, leaving loan-deposit ratios little changed. Demand edged up for commercial and industrial loans, residential construction loans, and commercial real estate loans, while demand eased somewhat for home mortgages. On the deposit side, all types of accounts edged up except large CDs, which were flat. All respondent banks raised their prime lending rates since the last survey, and all banks either raised their consumer lending rates or planned to do so in the near future. Lending standards were generally unchanged. Energy District energy activity remained very strong in September and early October. The count of active oil and gas drilling rigs in the region continued to edge higher and was up considerably from a year ago. Some producers continued to report constraints on drilling due to labor, material, and equipment shortages, though a majority of firms said they were drilling at their desired level. Expectations for future drilling activity were mixed. Several contacts said permit restrictions will reduce drilling over the winter, and others indicated some caution due to uncertainty about the future price of oil. On the other hand, a number of contacts anticipate further modest expansion due to their expectations for continued high oil and gas prices. Agriculture Agricultural conditions in the district generally remained solid in September and early October. With the harvest of spring-planted crops about half complete, crop quality and yields were generally at or above average levels. Also, fewer crop producers than in past years expected to file crop insurance claims. High yields, however, put downward pressure on prices, and some producers reported plans to store crops in anticipation of higher prices in the future. In the livestock market, high cattle prices continued to limit herd expansion, though pasture conditions improved over last year due to abundant moisture. Bankers generally expect farm incomes to increase slightly from last year's levels. Wages and Prices Wage pressures generally remained modest in September and early October, but some price pressures were evident at the wholesale level and for a few retail goods. Labor markets continued to show improvement, as hiring announcements rose further and layoff announcements declined. With the exception of oil and gas field workers and some types of skilled manufacturing workers, firms generally had few difficulties finding qualified workers, and most firms outside of the energy sector continued to face few wage pressures. Within the energy drilling sector, however, contacts reported raising wages 10 percent or more to attract entry-level field personnel. Most retailers reported flat selling prices compared with previous surveys and expect little change in prices heading forward. Exceptions include sellers of furniture, flooring, appliances, and hardware, who have raised prices slightly and expect further increases in coming months due to higher wholesale prices. Builders reported increased prices for a broad range of materials--including lumber, drywall, and a number of oil-based materials--and said they were passing these increases through to their customers. Some builders expect the materials price pressures to ease in coming months, but others do not. As in previous surveys, a large number of manufacturers reported increases in materials costs, and many of these firms also reported increases in output prices. Also, a sizable number of manufacturers expect to raise their output prices further in the months ahead. In addition, several trucking firms noted sharp increases in diesel fuel prices. These firms reported raising rates as much as possible to cover the increased costs but said they were limited in some cases by long-term contracts. Return to top Minneapolis Dallas