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 at a moderate pace in the June
and early July survey period. Consumer spending rose solidly and was
especially strong among restaurants and auto dealers. Factory production
rebounded from weakness in the prior survey period, and hightech and
transportation services firms reported continued growth. District
bankers reported weaker loan demand but increased deposits and improved
loan quality. Weak home sales and expanded inventory levels further
pressured single-family home prices, while commercial real estate
activity remained slow but stable. Activity in the energy sector was
robust as drilling expanded in most District states. Conditions in
agriculture were generally strong. Rising input costs were reported in
several sectors, but wage pressures were limited to select industries
and occupations.

Consumer Spending.

Consumer spending increased at a solid pace in June and early July,
and most contacts expected sales gains in the months ahead. Auto dealers
reported strong sales despite reduced incentives, with demand strongest
for small, fuel-efficient vehicles. Dealers noted the continued benefit
of low interest rates on sales and attributed some of the recent sales
boost to tornado damage in areas of Oklahoma and Missouri. Car and light
truck inventory levels were reported as generally satisfactory, although
shortages remained for some Japanese nameplates due to the tsunami.
Restaurant sales accelerated in June, and the outlook for the coming
three months remained strong. However, restaurant profit margins were
pressured by increased food costs and a further decline in the average
check amount. General retailers in the District reported flat sales in
the survey period, but activity remained well above year-ago levels.
Current retail inventories were viewed as adequate, but many retailers
planned to expand inventory in the coming months. Sales of low price
consumer goods were strong, while sales of many luxury items remained
sluggish. District tourism visitor counts were generally up, especially
at Colorado mountain resorts, but were slowed by wildfires and drought
in northern New Mexico. District hoteliers reported increased occupancy
and daily room rates.

Manufacturing and Other Business Activity.

Tenth District manufacturing activity rebounded from weakness in
the prior survey period, while high-tech and transportation activity
expanded further. Factory operators reported that both production and
shipments bounced back following weakness in May. The outlook among
manufacturers remained positive as new orders and backlogs similarly
rebounded. Inventories of finished goods were stable. Factory employment
increased in June for the eighth consecutive month and the average
workweek expanded slightly. Raw materials costs increased and put upward
pressure on finished goods prices. Factory operators also indicated
slightly weaker capital spending plans in the coming six months.
Transportation services firms reported increased activity in the current
survey period and were optimistic about future bookings. Several
trucking contacts cited continued difficulty attracting qualified
over-the-road drivers. Sales growth was strong at high-tech firms
despite some downward price pressure. High-tech firms remained
optimistic about future sales gains and planned to increase capital
spending in coming months.

Real Estate and Construction.

Excess inventory weighed on single-family home prices, while
commercial real estate remained weak but stable. Real estate firms
reported flat existing home sales, higher home inventory, and lower home
prices in June and early July. Contacts reported an increased share of
existing home purchases by investors in all-cash transactions.
Expectations for improvement in the housing sector were subdued. Home
builders reported little new construction activity but noted increased
buyer traffic. Entry-level homes sold well, along with high-end homes in
some Colorado mountain resort communities. Apartment managers reported
higher rents and lower vacancy rates. In commercial leasing, absorption
and vacancy rates were flat, and only small declines in rent and prices
were reported. Further declines in rent and prices were expected and
overall commercial leasing terms continued to favor tenants. Commercial
construction remained stable but weak, with strength reported in
multi-family residential projects. Builders indicated that access to
credit improved slightly. Construction supply firms reported increased
sales since the last survey, though inventories increased. Construction
materials prices remained steady excluding petroleum-based products.

Banking.

In the recent survey period, bankers reported weaker loan demand
but increased deposits and improvements in loan quality. Overall loan
demand was slightly weaker than in the previous survey. Demand for
residential real estate loans was unchanged, while demand for commercial
and industrial loans, commercial real estate loans, and consumer
installment loans decreased. Credit standards remained unchanged in all
major loan categories, and deposits increased for the fourth straight
survey. Bankers reported improvements in loan quality compared with a
year ago and in the outlook for loan quality over the next six months.
Energy. District energy activity expanded at a solid pace since the last
survey, and contacts expected continued growth in coming months.
Drilling activity expanded in most District states, however extended
permitting delays were noted on Bureau of Land Management sites in
Wyoming. Oil and gas contacts expected little change in crude oil and
natural gas prices in the coming three months. Energy firms increased
hiring in the current survey period but reported difficulty finding
qualified workers. Availability of equipment remained a constraint to
expansion, but financing was viewed as adequate. Weak coal production in
the Powder River Basin kept output well below year-ago levels. Ethanol
production edged up with slightly higher prices and profits this summer.

Agriculture.

Agricultural conditions varied with weather and input costs. Poor
pasture conditions due to drought in the Southern Plains prompted
increased placements of cattle in feedlots. However, initial reports on
wheat yields in drought areas of Kansas and Oklahoma were poor but
better than expected. The corn and soybean crops were progressing
normally and generally rated in good or better condition, especially in
Nebraska. Agricultural commodity prices remained high but volatile in
recent weeks, shifting with export and production forecasts. Rising feed
costs trimmed margins for livestock producers. Higher prices for
fertilizer, fuel, and feed boosted farm loan demand. Elevated crop
prices fueled further gains in District cropland values.

Wages and Prices.

District contacts reported only limited wage pressures but noted
additional upward pressure on input prices. Labor shortages and wage
pressures were reported in the retail sector and for select occupations
in the high-tech, energy, and transportation sectors. In addition,
several contacts expected future non-wage employment costs to rise as a
result of increased state unemployment insurance premiums. Manufacturers
reported continued upward pressure on input costs; slightly fewer
manufacturers reported increased finished product prices. Builders
reported higher overall prices for construction materials, and
transportation contacts remained concerned about the impact of high fuel
costs on profit margins. Expectations across most industries were for
further input price increases in the coming three months. Restaurants
had raised menu prices since the last survey and expected further
increases in the coming months.

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

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