WASHINGTON (MNI) – The following is the text of the Kansas City
section of the Federal Reserve’s Beige Book report on current financial
conditions released Wednesday:

TENTH DISTRICT – KANSAS CITY

The Tenth District economy expanded moderately in January and early
February. Despite a seasonal decline, consumer spending was stronger
than expected and retailers anticipated rising sales in coming months.
District manufacturing activity rebounded with stronger expectations for
production, hiring, and capital spending. Residential and commercial
real estate activity improved, and District contacts were optimistic
regarding spring sales and construction activity. District banks
reported steady loan demand and improved loan quality. Agricultural
growing conditions improved with recent precipitation, and farmland
values soared with high commodity prices. High crude oil prices fueled a
rebound in District drilling activity with further gains expected during
the next three months. More contacts reported passing higher raw
materials prices through to finished goods prices. Many District
contacts planned to hire additional workers during the next quarter.
Still, wage pressures remained largely subdued except for specialized
positions in high-tech and energy industries.

Consumer Spending.

Consumer spending weakened in January and early February but was
expected to rebound in the months ahead. District retailers reported a
slowdown in sales after the holidays as consumers shopped for bargains.
Still, store owners noted sales exceeded expectations by rising above
year-ago levels and many remained optimistic that sales would improve in
the coming months. Clearance items moved quickly, and appliance sales
ticked up while demand for furniture and electronics was weak. Auto
dealers reported a post-holiday lull in sales that boosted inventory
levels, especially for SUVs and more expensive car models. However, auto
dealers expected stronger demand for smaller, fuel efficient cars would
spur sales in the coming months. Some dealerships were hiring
salespeople and service technicians. Restaurant sales were down from the
previous survey but remained higher than year-ago levels and were
expected to pick up with warmer weather. Tourism activity slowed after
the holidays and below-average snowfall hurt bookings at Colorado ski
resorts. District hotel owners, however, reported an uptick in occupancy
at slightly higher average room rates and expected business to
strengthen further during the next three months.

Manufacturing and Other Business Activity.

Manufacturing activity rebounded, and sales at high-tech service
firms rose sharply while transportation activity edged down in the
survey period. Manufacturing activity expanded at both nondurable and
durable goods factories, particularly those producing chemicals,
fabricated metals, and aircraft equipment. After falling in late 2011,
the volume of new orders and shipments rebounded in January and February
and finished goods inventories held steady with increased production.
Plant managers expected production, hiring, and capital spending to
strengthen during the next six months. The high-tech industry reported a
sharp increase in sales, and some contacts were worried about losing
future business due to a shortage of specialized labor, particularly
software developers. Transportation activity slowed further but was
expected to improve in the months ahead. Trucking firms remained
concerned about high fuel costs and a lack of qualified drivers. Real
Estate and Construction. Residential and commercial real estate activity
picked up in January and early February. Existing home inventories
declined as lower prices spurred a modest increase in sales,
particularly for low- and mid-priced homes. Real estate contacts
expected that a seasonal upswing in sales this spring would stabilize
home prices in the coming months. Residential mortgage lenders reported
an uptick in loans for home purchases and higher average loan amounts
while home loan refinancing activity was expected to slow further.
Residential lot prices fell further, and new home starts were on par
with year-ago levels. Builders planned to ramp up construction in the
coming months and sales rose at building supply firms. New commercial
construction increased and was expected to rise further with more
projects in the pipeline. Commercial real estate prices and rents dipped
during the survey period but were expected to firm as vacancy rates
improved. After edging up in January and early February, commercial real
estate sales were expected to strengthen further during the next few
months. Developers reported little change in access to credit.

Banking.

In the recent survey period, bankers reported generally steady loan
demand, slight improvements in loan quality, and a modest increase in
deposits. Most respondents reported steady loan demand for commercial
and industrial loans and commercial real estate loans. However, loan
demand was slightly weaker for consumer installment loans and
residential real estate loan demand softened with slower home mortgage
refinancing activity. Bankers reported that interest rates on commercial
and industrial loans declined further. Credit standards remained largely
unchanged in all major loan categories, and most respondents reported
stable or increased deposits. The majority of bankers reported improved
loan quality compared with a year ago, and many bankers expected loan
quality to improve further during the next six months.

Agriculture.

Agricultural growing conditions fluctuated with precipitation
levels. After warm, dry weather in January, recent precipitation kept
agricultural growing conditions from deteriorating further. The winter
wheat crop remained in fair to good condition. Soil moisture levels were
low across the District with western Oklahoma and Kansas experiencing
severe drought. Ranchers in the southern Plains continued to liquidate
herds due to poor pasture conditions and record high cattle prices. In
the northern Plains, the lack of harsh winter weather allowed cattle
feedlot operators to reduce feed usage and still maintain livestock
growth. District contacts expressed concerns about 2012 profit margins
due to rising feed, fuel, and fertilizer costs. Still, a rebound in crop
prices fueled additional gains to record high farmland values and more
bankers expected farmland prices to move higher in the next few months.

Energy.

Energy activity rebounded in January and early February and
District contacts expected additional expansion in coming months. After
slowing at the start of the year, District drilling rig activity
rebounded with higher crude oil prices. Energy contacts, however, noted
that a lack of equipment and services and qualified labor were
constraints on current drilling activity. District contacts expected
crude oil and natural gas prices to hold at current levels and
anticipated further expansion in oil drilling activity. Bucking national
trends, Wyoming’s coal production rose above year-ago levels in January
and early February. Ethanol profits dropped sharply as ethanol prices
declined with the year-end expiration of the federal ethanol subsidy.
Wages and Prices. Wage pressures remained low during the survey period,
and more contacts reported raising finished goods prices in light of
higher raw materials costs. More businesses planned to hire workers
during the next three months, and contacts in low- and moderate-income
communities reported a slight improvement in job opportunities. However,
most firms did not plan to raise wages except for specialized positions,
particularly in the hightech and energy fields. After edging up during
the past survey period, more retailers expected to raise selling prices
over the next three months. Restaurateurs expected further increases in
menu prices due to soaring food costs. Hotel operators planned to
increase room rates with higher occupancy rates. Manufacturers paid
higher prices for raw materials, and more manufacturers planned to pass
on higher costs to finished goods prices. Builders and construction
supply companies noted rising prices for construction materials,
especially drywall and asphalt shingles. Transportation companies paid
high fuel prices, and some were raising shipping rates.

** Market News International Washington Bureau: 202-371-2121 **

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