WASHINGTON (MNI) – The following is the Beige Book section on the
Federal Reserve’s Tenth District, published Wednesday:

TENTH DISTRICT – KANSAS CITY

The District economy strengthened in October and early November,
despite headwinds from the residential and commercial construction
sectors. Additional gains in consumer spending boosted optimism for
holiday sales among retailers and auto dealers. With moderate gains in
October and November, manufacturing plant managers expected production
activity and new orders to rise further with a pick-up in export
activity. Energy and agricultural activity rose robustly with strong
demand, low inventories, and a weaker dollar lifting commodity prices.
In contrast, residential and commercial construction remained weak,
although commercial real estate sales and vacancy rates were expected to
improve in coming months. Banking conditions remained stable with more
District bankers expecting improvements in loan quality. Despite higher
raw material prices, wholesale and retail prices held steady. Wage
pressures remained subdued, though some firms were hiring for seasonal
and specialized labor.

Consumer Spending

Consumer spending improved further in October and November, and
contacts were optimistic about future sales heading into the holiday
season. District retailers reported stronger sales with limited
discounting on merchandise. Contacts indicated an uptick in durable
goods sales, especially appliances, while sales of luxury items were
slow. After declining in the last survey period, auto dealers reported a
slight improvement in sales, especially for trucks and used cars.
Dealers anticipated demand would continue to strengthen through
year-end, and some planned to hire sales staff and service technicians.
Restaurant traffic was up, while the average check amount declined. With
the end of the summer travel season, average room and occupancy rates
edged down at District hotels, but tourism activity was stronger than
expected.

Manufacturing and Other Business Activity

After rebounding in the last survey period, District manufacturing
activity continued to expand, and many firms expected further growth in
the next six months. While production levels varied across industries,
some of the strongest gains were at food, fabricated metal, and
electronics manufacturers. In general, new orders, shipments, and
production activity strengthened in recent weeks, contributing to rising
order backlogs and shrinking finished goods inventories. In the next six
months, plant managers expected production, shipments and orders,
especially for export, to strengthen further. In addition, more factory
managers planned to increase staff or make capital purchases in coming
months. High-tech firms also reported a rise in sales that was expected
to continue through year-end. After slowing in the last survey period,
activity in the transportation sector stabilized and some firms noted a
shortage of qualified drivers.

Real Estate and Construction

Residential and commercial construction remained sluggish in
October and November, while commercial real estate sales and vacancy
rates were expected to improve in coming months. After contracting with
the end of the homebuyers tax credit program, a few District
homebuilders noted a slight uptick in housing starts. Still, District
home prices edged down and sales continued to fall heading into the
typical winter lull in home buying activity. District contacts noted
that the starter home market remained active, but long lead times for
selling mid- and upper-priced homes were boosting inventories and
limiting “move-up” opportunities. Mortgage loan activity rose as
homeowners refinanced existing mortgages to lower payments and shorten
terms. Commercial construction activity declined and was expected to
remain weak over the next three months. District commercial real estate
contacts reported little change in vacancy rates, absorption rates, and
prices. Some firms, however, reported an uptick in sales and expected
vacancy rates to edge down in coming months.

Banking

Bankers reported stable loan demand, increased deposits, and an
improved outlook for loan quality in the recent survey period. Overall
loan demand continued to hold steady as demand for commercial and
industrial loans, commercial real estate loans, and consumer installment
loans remained stable. In contrast, bankers reported stronger demand for
residential real estate loans. Compared to the previous survey, credit
standards remained unchanged in all major loan categories. Loan quality
was essentially unchanged compared to one year ago. Bankers, however,
expected loan quality to improve over the next six months. Deposits,
especially for transaction accounts and savings accounts, increased
after having been flat since late last year.

Agriculture

Agricultural conditions improved since the last survey period.
Favorable weather conditions across the District facilitated an early
corn and soybean harvest with yields less than original estimates but
slightly better than their five-year average. The winter wheat crop was
progressing normally. Crop prices continued their steady climb through
the fall harvest, boosting incomes for crop farmers but raising feed
costs for livestock producers. Farmland values and cash rental rates
strengthened further with higher farm incomes and robust demand for good
quality farmland from both farmers and non-farm investors. Farm
operators also increased spending on farm equipment and grain storage
bins. Demand for farm operating loans was steady, and agricultural
bankers reported ample funds were available for qualified borrowers at
historically low interest rates.

Energy

District energy activity continued at a robust pace in October and
November. The number of active drilling rigs in the District rose
further, primarily due to natural gas expansion in Oklahoma and New
Mexico. Producers expected drilling activity to remain elevated over the
next three months; however some firms reported that equipment shortages,
difficulty finding qualified labor, and availability or cost of
financing were constraining drilling activity. District contacts
anticipated a modest increase in natural gas prices as the winter
heating season approached. Crude oil prices were also expected to
strengthen with rising demand and a weaker dollar. After surging in the
last survey period, Wyoming coal production continued apace. With higher
ethanol prices, profits at ethanol plants held steady despite higher
corn prices raising operating costs.

Wages and Prices

Prices paid for raw materials rose further in October and November,
but selling prices and wages generally held steady. District
manufacturers reported higher raw materials prices and expected
additional increases in the next six months. They also expressed a
limited ability to pass on higher input costs to current finished goods
prices. However, more factory managers expected to receive higher
finished goods prices over the next six months. Restaurants paid more
for food, but kept menu prices stable. After rising in the last survey,
prices for building materials held steady. Though a limited number of
firms were hiring, primarily for specialized labor or seasonal workers,
few were raising wages to attract qualified applicants. Wage pressures
were expected to remain subdued through the end of the year.

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

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