WASHINGTON (MNI) – The following is the latest Beige Book survey of
economic conditions in the Federal Reserve’s Tenth District, published
Wednesday:

TENTH DISTRICT – KANSAS CITY

The Tenth District economy continued to expand at a moderate pace
in July and early August. Retailers and auto dealers reported higher
sales and expected increased activity in the months ahead. Manufacturing
activity expanded slightly, with additional gains expected over the next
six months. Transportation activity grew moderately, while sales in the
high-tech services sector declined slightly. Residential and commercial
real estate markets continued to improve with increased sales,
construction, and prices. Banking contacts reported slightly higher loan
demand and improved loan quality. Agricultural conditions deteriorated
under extreme drought conditions leading to higher crop prices and
strained profit margins for livestock producers. The energy sector held
steady as growth in crude oil drilling continued to offset the decrease
in drilling for natural gas. Most sectors reported higher input prices,
but final goods prices and wage pressures remained stable.

Consumer Spending. Consumer spending continued to increase in July
and early August and was expected to rise further over the next three
months. Retailers reported higher sales, though gains were a bit less
than expected. Home furnishings, clothing and back-to-school items sold
well, while sales of high-end jewelry were weaker. Auto sales increased
sharply as more incentives were offered and access to credit improved
slightly. Demand for small and mid-sized crossovers, SUVs and cars was
strong, while demand for larger SUVs and minivans remained weak. Most
auto dealers expected sales to strengthen further in the months ahead.
Restaurant sales increased, and several contacts expected higher menu
prices in coming months in response to rising food costs. After strong
gains in June, hotel occupancy fell slightly in July and early August,
but average room rates continued to rise. In terms of tourism, the
number of visitors at local attractions grew slightly, and modest gains
were expected in the months ahead.

Manufacturing and Other Business Activity. Transportation activity
continued to grow moderately, manufacturing activity expanded slightly,
and sales at high-tech services firms declined slightly. Transportation
activity continued to rise, with an increase in sales and backlog
activity. Input prices and prices charged for transportation services
increased with higher fuel costs. Capital spending plans at
transportation firms remained largely unchanged, with firms continuing
to expect a modest increase in capital spending in coming months.
Manufacturing production and hiring rose modestly, though the volume of
new orders, volume of shipments, and backlogs declined since the last
survey. Manufacturers expected activity to expand in coming months.
Sales at high-tech services firms decreased slightly, and capital
spending grew modestly. High-tech contacts expected improved sales in
the months ahead and a strong rise in capital spending.

Real Estate and Construction. Residential and commercial real
estate activity continued to improve in July and early August, and
construction activity strengthened. Residential home sales and prices
rose, and home inventories fell. Contacts reported multiple offers on
homes and expected continued housing market improvements in coming
months. Homes under $300,000 sold particularly well, while homes priced
over $500,000 and condos were slow to sell in some markets. Several
contacts reported that a large inventory of homes in foreclosure has
been held back and could put downward pressure on prices when the homes
come onto the market. Builders reported an increase in housing starts
and a rise in new home prices as well as improvement in the traffic of
potential buyers. Land prices and the cost of building materials rose
during the survey period as demand improved. Commercial real estate
conditions also improved. Construction and sales of commercial real
estate properties rose, real estate prices and rents increased, and
vacancy rates continued to fall. Several commercial real estate contacts
expected uncertainty surrounding the presidential election to slow
activity until late in the year. Developers reported that access to
credit remained unchanged.

Banking. In the recent survey period, bankers generally reported
slightly stronger loan demand, improving loan quality, and little change
in deposits. Overall loan demand improved slightly as most respondents
reported stable loan demand for commercial and industrial loans,
commercial real estate loans, and consumer installment loans, while
demand for residential real estate loans improved. Credit standards
remained largely unchanged in all major loan categories, and the
majority of respondents reported stable deposits. The majority of
bankers reported improved loan quality compared to a year ago, and
nearly all banks expected loan quality over the next six months to
remain steady or improve.

Agriculture. Agricultural conditions deteriorated as crops withered
under extreme drought. The majority of the corn and soybean crops were
rated in fair or poor condition, cutting production estimates and
sending crop prices to record highs. Drought strained profit margins for
livestock producers as feed costs rose and further herd liquidations
dampened cattle prices. Escalating production costs were expected to
boost farm loan demand in the coming months. Agricultural bankers
indicated ample funds were available for farm loans at historically low
interest rates. Loan repayment rates were expected to hold near year-ago
levels due in large part to crop insurance and higher land lease
revenues for mineral rights. While still well above year-ago levels,
farmland values rose less rapidly and were expected to hold steady
during the rest of the growing season.

Energy. District energy activity remained fairly stable at high
levels in July and early August. Drilling activity rose as growth in the
number of active crude oil rigs offset declines in natural gas drilling.
Most contacts expected drilling activity to slow in coming months due to
local and national regulatory obstacles and low natural gas prices.
Stable demand growth and ample supply of crude oil were expected to
limit further increases in crude oil prices in coming months. Contacts
expected the slowdown in natural gas drilling to put upward pressure on
natural gas prices over the next three months. Shortages were reported
for equipment and labor, particularly for oil and natural gas operators
and drilling engineers. Several contacts also reported that the drought
has affected drilling operations by limiting water availability needed
for hydraulic fracturing.

Wages and Prices. Finished goods prices remained stable despite an
increase in raw material prices, and wage pressures remained low.
Manufacturers reported higher raw material prices, and finished goods
prices remained flat. However, both raw material prices and finished
goods prices were expected to increase over the next six months in the
manufacturing sector, especially for food manufacturers. Retail prices
increased slightly, and additional price increases were expected to
remain modest. Restaurant menu prices remained flat, but many contacts
expected to raise prices in the months ahead in response to higher food
costs. Builders and construction supply firms also reported higher
prices, especially for roofing materials, lumber and concrete. Wage
pressures remained subdued, and only a few contacts expected to raise
wages more than normal to attract or retain workers. However, many firms
continued to report some difficulty filling skilled positions including
drivers, technicians, engineers, computer programmers, and sales
representatives.

** MNI Washington Bureau: 202-371-2121 **

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