WASHINGTON (MNI) – The following is the first of two parts of the
text of the Federal Reserve’s Beige Book survey from the Kansas City
district, published Wednesday:

TENTH DISTRICT – KANSAS CITY

The Tenth District economy expanded further in January and early
February, though inclement weather dampened consumer spending. Retailers
reported that severe winter storms contributed to limited sales but they
expected a rebound in coming months. District manufacturers reported
solid growth since the previous survey period and anticipated strong
future activity. Little improvement was noted in residential real
estate; however, commercial real estate showed further signs of
stabilization. District banks reported a decrease in overall loan
demand, increased deposits, and stable loan quality. In agriculture,
poor growing conditions and tight supplies raised commodity prices.
Hiring and production expanded in the energy sector along with drilling
activity in key oil and gas liquids fields in the District. Retailers
and manufacturers noted added pressure on profit margins from increased
materials costs. There was little evidence of wage pressures across
District labor markets.

Consumer Spending.

Many District retailers reported that unusually severe winter
storms limited sales activity in January and early February. Several
retail contacts noted temporary layoffs and reduced hours for workers in
response to the inclement weather. Overall, sales generally remained at
or above year-ago levels and most retailers remained optimistic that
sales would increase in coming months. While auto sales softened due to
severe winter storms, dealers were satisfied with inventory levels and
expected a sharp rebound in sales in the near future. Most tourism
contacts reported decreased visitor counts compared with month- and
year-ago levels, and respondents indicated severe winter weather as a
possible deterrent. However, mountain ski resorts reported strong
results due to the heavy winter snowfall. Hotel operators reported that
occupancy rates remained flat during the reporting period while room
rates continued to decline. Most lodging respondents expected no change
in occupancy rates and continued declines in room rates in the coming
months.

Manufacturing and Other Business Activity.

District manufacturing activity continued to expand, while
high-tech services and transportation activity slowed somewhat. Factory
production and orders expanded solidly, and backlogs rose moderately.
Inventories of both raw and finished goods increased slightly. Many
manufacturers hired additional workers and anticipated hiring gains will
remain solid in the coming six months. Concerns persisted about rising
input costs, but an increasing number of factory operators reported an
ability to raise finished goods prices. Planned capital expenditures at
factories were up, although most contacts reported adequate capacity.
Sales at high-tech firms softened in the latest reporting period,
especially those related to federal stimulus spending. High-tech
contacts nonetheless noted strength in sales related to data centers and
e-commerce. Transportation firms reported weak activity in the current
reporting period but remained optimistic that conditions would improve
in the coming three months. Several transportation contacts cited rising
fuel costs and difficulty finding qualified drivers as possible
constraints on future growth.

Real Estate and Construction.

Residential real estate activity remained sluggish in January and
early February, while the commercial real estate sector showed further
signs of stabilization. The residential real estate sector remained
hampered by falling transaction volumes and increased inventories of
unsold homes. Weak sales of both new and existing homes put further
downward pressure on home prices, but real estate agents anticipated a
surge in home sales this spring due to seasonal buying patterns.
Although housing starts were flat, residential builders remained upbeat
and reported a rebound in traffic. Commercial real estate activity
stabilized with increased sales and leasing activity, reduced vacancy
rates, and increased absorption. Nonetheless, further declines were
reported in rents and selling prices and developers’ access to credit
remained constrained. Mortgage lenders noted a continued decline in
mortgage loan demand and refinance activity due to rising mortgage
interest rates. In addition, mortgage lenders noted a decrease in
average loan size and higher average down payments.

Banking.

Bankers reported weaker loan demand, increased deposits, and an
improved outlook for loan quality in the recent reporting period.
Overall loan demand decreased slightly as demand for commercial and
industrial loans, residential real estate loans, and consumer
installment loans decreased while commercial real estate loan demand
edged up. For the fourth straight survey, credit standards remained
unchanged in all major loan categories. Loan quality was mostly
unchanged from the previous period, while the outlook for loan quality
over the next six months improved. Bankers reported increased deposits
with gains in transaction and money market accounts.

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

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