WASHINGTON (MNI) – The following is the text 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 at a modest pace in late
November and December. Consumer spending softened, with weakness in
auto, restaurant, and tourism sales. District manufacturing activity
contracted slightly, though factory operators remained optimistic about
growth in the coming months. High-tech firms reported continued strong
growth, while transportation activity was flat. Residential and
commercial real estate conditions remained broadly weak, but contacts
expressed increased optimism about sales and prices in the coming
months. District banks reported generally steady loan demand and
improved loan quality. High crude oil prices buoyed activity in the
District’s energy sector. Agricultural growing conditions improved, but
higher input and production costs constrained farm profits. Rising input
costs were reported in several sectors, but few District contacts noted
either hiring shortages or wage pressures.

Consumer Spending. Consumer spending softened in late November and
December, with a slowdown in the auto, restaurant, and tourism sectors.
Many District contacts attributed the weakness in spending to ongoing
regulatory and political uncertainty. Most retailers, however, expected
spending to rise over the next three months. Following several months of
strong activity, auto dealers reported a dip in sales with slower sales
expected in coming months. Auto inventories increased over the previous
survey period, and most dealers reported satisfaction with current
levels. Restaurant sales were flat despite larger average check amounts.
However, restaurant contacts expected sales to rebound over the next
three months. Tourism activity slowed, as winter storms hampered some
tourist activity but helped ski resorts. Hoteliers reported lower
occupancy rates but stable average room rates.

Manufacturing and Other Business Activity. Manufacturing activity
contracted slightly during the survey period, but factory operators
remained optimistic about the coming months. Activity was broadly
weaker, with production, shipments, and new orders lower relative to the
prior survey. The weakest sectors were food processing and fabricated
metals, while growth in machinery and high-tech manufacturing remained
strong. Order backlogs, manufacturing employment, and average hours
worked declined. Despite weaker activity, expectations were positive for
the coming months for production, shipments, and orders. Transportation
firms reported mostly unchanged conditions as activity remained well
above year-ago levels. Most high-tech services firms reported sales
gains and increased capital spending. Contacts in both the
transportation and high-tech sectors reported continued difficulty
finding skilled workers.

Real Estate and Construction. Residential and commercial real
estate activity remained sluggish in late November and December.
District home prices were flat, but most real estate contacts expected
prices to rise along with home sales over the next three months.
Multiple contacts reported multi-family housing as a source of strength
in the housing market. Mortgage lenders reported weak mortgage demand
with fewer home purchases and refinancings relative to the previous
survey period. Lenders cited stricter mortgage lending requirements as a
key factor underlying weak loan demand. Housing starts declined further,
and expectations about future construction activity remained subdued.
Construction supply firms reported weak sales over the survey period,
and most expected little change in activity over the coming months.
Commercial real estate sales, prices, and vacancy rates improved, and
District contacts were more optimistic about the coming months. Rents on
commercial properties were stable and expected to rise over the next
three months. Developers reported little change in access to credit.

Banking. Almost all bankers reported generally steady loan demand,
stable or improving loan quality, and increased deposits. Loan demand by
category was mixed. Most respondents reported steady loan demand for
commercial and industrial loans, commercial and residential real estate
loans, and consumer installment loans. Remaining respondents were split
between stronger and weaker demand within each of these categories.
Credit standards remained largely unchanged in all major loan categories
and deposits increased for the eighth straight survey. Bankers generally
reported loan quality as steady or improving compared to a year ago and
reported the outlook for loan quality over the next six months as steady
or improving.

Agriculture. Agricultural growing conditions improved in late
November and December but farm income prospects dimmed with high input
costs. Timely rains eased drought conditions in the Southern Plains.
Most of the winter wheat crop emerged in good condition, though more
protective snow cover was needed for the winter dormancy period.
Volatile crop prices and high input costs tempered crop profit
expectations for the coming year. High production costs trimmed margins
for livestock operators even though strong export demand underpinned
prices. Still, with historically high profits, many farmers were
repaying operating loans, buying farmland and purchasing additional
machinery and equipment. District contacts reported an increase in the
number of farmland auctions as record high land prices enticed more
landowners to sell.

Energy. District energy and mining contacts reported continued
strong activity in late November and December and remained optimistic
about the coming months. Drilling rig counts were flat in most District
states but remained well above year-ago levels. Drilling continued to
shift away from dry natural gas and toward liquid-rich formations.
However, crude exploration in the Niobrara formation in Wyoming slowed
as contacts reported better opportunities in other areas. Producers
expected stable crude prices but relatively weak natural gas prices over
the next three months. Attracting qualified workers and finding adequate
equipment remained a concern for oil and gas contacts. District coal
production declined slightly in November and December and remained below
year-ago levels. A recent drop in ethanol prices trimmed margins for
ethanol producers despite lower input costs and strong export demand.

Wages and Prices. District contacts reported higher prices for both
inputs and finished goods, but wage pressures remained confined to
select industries and occupations. Manufacturers reported an uptick in
input prices in late November and December, but relatively few reported
higher finished goods prices. Manufacturers expected further price
increases for both inputs and finished goods in the coming months. Most
restaurants reported a continued rise in food costs and expected further
increases over the next three months. Retailers and transportation firms
increased prices in the latest survey period, while construction
suppliers reported falling prices due to weak building demand. Few
contacts outside of the energy, high-tech, and transportation sectors
reported either hiring shortages or upward wage pressures, and most
expected little wage pressure in the coming months. Rising employee
benefit costs, particularly for health care, remained a concern for many
contacts.

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

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