March 3, 2004 Federal Reserve Districts Tenth District--Kansas City

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The Tenth District economy continued to grow in January and February. Manufacturing activity expanded further, and retail sales excluding autos were up moderately. Housing and energy activity generally maintained a brisk pace, and agricultural conditions remained favorable overall. On the negative side, auto sales fell slightly, and commercial real estate remained weak. Labor markets also remained slack, although some increases in hiring were noted. Wage and price increases were generally minimal, but rising costs of materials appeared to be putting some upward pressure on manufacturers' output prices. Consumer Spending Non-auto retail sales in the district were solid in January and February, as most stores reported moderate increases from a year ago. Among product categories, sales were particularly strong for most kinds of apparel and home improvement items. With the recent solid sales, most store managers were satisfied with inventory levels and planned typical increases in stocks heading into spring. Most managers remain optimistic that solid year-over-year sales growth will continue in coming months, and some stores plan modest increases in hiring. In contrast to non-auto retail sales, sales of motor vehicles weakened somewhat in January and February and were below year-ago levels in much of the district. With the weaker-than-expected overall sales, inventories at most dealerships were higher than desired. On the positive side, some dealers reported a pick-up in used vehicle sales, and nearly all dealers expect total vehicle sales to improve in coming months. Tourism activity in the district was generally strong. Rocky Mountain ski areas reported increased out-of-state visits in February, and activity was especially brisk over the President's Day weekend. Airport traffic also increased further in most cities. Heading forward, travel agents generally report solid bookings for spring leisure travel. Manufacturing District manufacturing activity expanded further in January and February, although rising input costs were putting increased pressure on many firms' profit margins. Plants generally reported higher levels of capacity utilization than in previous surveys, and shipments remained well above year-ago levels. Factory employment and hours were also reported to be slightly higher than in previous surveys. Firms remained quite optimistic about future production, due in part to persistent order backlogs and low levels of finished goods inventories. In a change from past surveys, contacts in the aircraft manufacturing sector were also cautiously optimistic. Most manufacturing materials remained generally available, and managers expect few changes in lead times heading forward. Many plant managers, however, expressed considerable concern about the effects of recent sharp increases in the price of steel and some energy-based products. Real Estate and Construction Residential real estate activity continued at high levels in January and February, while commercial real estate markets remained weak. Although single-family housing starts edged down in most district cities, starts generally remained near last year's strong levels. Moreover, most builders expect home construction to strengthen somewhat through the spring, over and above the normal seasonal increase. Realtors reported that home sales were flat to slightly higher in most district cities following modest declines in late 2003. Home prices were basically unchanged from previous surveys. Realtors generally expect continued improvement in home sales and moderate increases in home prices in coming months. Mortgage lenders reported a modest rise in mortgage demand, as demand for both new home purchase loans and refinancings increased slightly. Lenders expect mortgage demand to continue to edge higher through the spring. Commercial real estate activity in the district remained weak in January and February. Office vacancy rates and prices for office space were largely unchanged in most district cities. On the positive side, however, sales of office space were up slightly in some cities, and commercial realtors generally expect modest improvements in office markets in 2004. Banking Bankers report that loans and deposits both held steady since the last survey, leaving loan-deposit ratios unchanged. Demand for home mortgage loans stabilized after falling in the last two surveys, and demand for other loan categories was also little changed. On the deposit side, slight increases in liquid accounts and small time deposits were offset by a decline in large CDs. All respondent banks left their prime lending rates and consumer lending rates unchanged. A few rural banks tightened lending standards, citing concerns about local business activity. Energy District energy activity maintained a brisk pace in January and February. The count of active oil and gas drilling rigs in the region was unchanged from the previous survey and still 30 percent above year-ago levels. Some producers reported that a shortage of qualified rig crews was constraining expansion of drilling. Most energy contacts expect slow but sustained growth in drilling activity in coming months, as energy prices are expected to remain high. Agriculture District agricultural conditions generally remained solid in January and February, although the drought continued to have some adverse effects. District bankers reported minimal financial impact on producers from the mad cow incident last December, and credit reviews generally showed improvement in farm loan portfolios during the past year due to strong cattle and grain prices. Farmland values also remained high in most parts of the district. On the negative side, the winter wheat crop remained dry. Also, while ample hay supplies kept forage plentiful, lingering drought conditions caused most cattle producers to continue to delay expansion of their herds. Wages and Prices Wage and price increases generally remained modest in January and February, but there were more signs of upward price pressures in manufacturing. As in the previous survey, hiring announcements by district firms exceeded layoff announcements. Nevertheless, reports of labor shortages remained relatively scarce outside of the health care, energy, and trucking industries, and most firms continued to offer only cost-of-living wage increases. Most retailers reported flat prices compared with previous surveys and expect little change in their prices heading forward. Builders reported rising costs for some materials, including lumber, sheetrock, and steel products, and they expect continued increases through the spring. In the manufacturing sector, firms noted sharp cost increases for steel and some energy-based products. To cover these cost increases, a sizable number of firms either increased selling prices or plan to do so in coming months. A couple of firms said they would have to raise output prices just to stay in business. A few other firms, however, reported they were able to increase productivity enough to offset the higher costs. Return to top Minneapolis Dallas