July 25, 2007 Federal Reserve Districts Tenth District--Kansas City

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The Tenth District economy continued to grow in June and early July, but at a moderating pace. Consumer spending was mixed, with reportedly level retail sales but robust activity in the travel and leisure industries. Manufacturing activity slowed and residential real estate activity remained weak, but these trends were partially offset by strong commercial construction activity. Energy activity continued to rise. Recent precipitation improved growing conditions, although excess moisture in some areas limited wheat production. Overall, District labor markets continued to expand, with announced hiring outpacing planned layoffs. Reports of labor shortages and wage pressures remained unchanged from the last survey period. Price pressures generally eased modestly despite high agricultural and energy prices. Consumer Spending Consumer spending varied across sectors in June and early July, but sentiments about future activity were positive. Most retailers reported no change in sales from May, which were below expectations reported in the last survey. Sales of lumber, apparel and electronics were stronger, while home furnishings sales were weak. Nonetheless, store inventories decreased and retailers anticipated faster sales growth in the months ahead. Auto dealers reported sales were somewhat below expectations and lower than one year ago, but they remained optimistic about future sales. Travel and tourism spending was robust during the survey period, with District contacts optimistic about future activity. Restaurants reported stronger sales growth than in May. Hotel occupancy rates and average room rental rates rose solidly. Manufacturing Manufacturing activity slowed in June, although expectations about future activity improved. The slowdown was concentrated in food processing, machinery manufacturing, and transportation equipment manufacturing. The backlog of orders increased, as a reduction in both employment and work hours accompanied the drop in output. Inventories of materials and finished goods increased again, after edging up in May. Despite the immediate reduction in manufacturing activity, plant managers remained optimistic. Production, shipments and new orders were expected to return to levels comparable to May. Although District manufacturers trimmed their capital expenditures slightly, they expected capital spending to resume at prior levels in the coming months. Real Estate and Construction The residential real estate sector remained weak in most areas, while commercial real estate activity continued to expand. District residential sales slowed from May and were below year-ago levels. Nevertheless, there were positive reports about residential real estate activity from markets in New Mexico and Wyoming. Several sources from throughout the District reported that low to mid-priced homes sold better, while the market for condominiums and upper-end homes remained weak. Home sales prices continued to decline in most markets in June and early July, but at a slower pace than in May. Home inventories remained up from the same time last year. Commercial real estate activity expanded moderately in June and early July. Office vacancy rates continued to trend down and were expected to decline in future months. Absorption rates remained unchanged from the May survey but were expected to increase further in future months. Growth in commercial rents moderated from the May survey, but expectations point to future increases in rents. Banking Bankers reported that loan demand edged down and deposits were unchanged since the last survey. Demand for residential mortgage loans declined slightly, while demand in all other categories remained basically unchanged. On the deposit side, a few bankers noted a shift in funds from demand deposits to interest-bearing accounts. Lending rates and lending standards were unchanged. Energy Energy activity rose in June and early July, with the total number of drilling rigs increasing in all major energy-producing states in the District. Energy activity was expected to increase further due to the recent jump in energy prices. Labor constraints in the District energy industry eased slightly, with fewer contacts reporting difficulty finding qualified workers and more companies intending to add staff. Agriculture Agricultural conditions were generally favorable, though wet weather raised concerns about the District's winter wheat crop in some areas. Heavy rains in Kansas and Oklahoma, which caused some flooding, delayed the winter wheat harvest and led to deteriorating crop conditions. Other parts of the District, however, reported above-average wheat yields. Recent precipitation also further eased drought conditions and improved pasture conditions. Despite some late planting due to wet fields, both corn and soybean crops were reported to be growing well. The hog market remained solid, while a recent dip in cattle prices tightened margins for cattle producers. High crop prices continued to bolster farm financial conditions, and loan repayment rates remained high and the number of requests for loan renewals and extensions eased further. Labor Markets and Wages District labor markets continued to add jobs in June and early July, albeit at a slower pace than in the previous survey period. Hiring announcements continued to outpace planned layoffs, but net hirings were lower than in previous months. Several aircraft manufacturers announced hirings, while some District financial services and healthcare companies trimmed staff levels. District contacts continued to report labor shortages. Many of these reports were in skilled occupations, like finance and engineering, but not exclusively; District contacts also reported a shortage of sales professionals. Contacts in the retail, leisure and hospitality industries reported difficulty finding and retaining workers across all levels of staff, including management. The same proportion of respondents reported wage pressure as in the previous survey. Prices Price pressures eased in June and early July, despite high energy and agricultural prices. District manufacturers reported lower raw materials prices in June, while manufacturing selling prices remained relatively unchanged from May. The vast majority of retailers reported either flat or lower retail selling prices. Most retailers expected similar patterns going forward, with the exception of lumber retailers, who expected higher prices. Restaurants anticipated raising menu prices in future months in response to higher food costs. Return to top Minneapolis Dallas