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 expanded at a faster pace in late
February and March. Consumer spending improved, residential real estate
activity rose solidly, and commercial real estate activity edged higher.
Growth in the energy industry eased slightly but remained solid.
Manufacturing firms reported further increases in activity, and
agricultural conditions improved from the previous survey.
Transportation activity picked up slightly, and high-tech service firms
said sales growth was mostly solid. Bankers noted steady loan demand,
better loan quality, and rising deposits. Prices rose slightly, but wage
pressures were contained outside of a few skilled positions.

Consumer Spending

Consumer spending improved and expectations for the months ahead
remained solid. Retail sales rose moderately from the previous survey,
although several contacts noted concerns about lower discretionary
spending due to rising gasoline prices. Store inventories remained
stable and were expected to rise only slightly in future months. Auto
sales rebounded strongly from the previous survey, with several dealers
citing increased customer traffic and pent up demand as key reasons.
Contacts said rising fuel prices have led to stronger sales of fuel
efficient vehicles, and sales of large SUVs and trucks weakened.
Expectations for future auto sales remained positive and inventories
continued to increase. Restaurant sales improved, with further growth
expected in coming months. Tourist activity edged higher, with several
contacts noting increased business travel. Tourism contacts remained
generally optimistic about future months.

Manufacturing and Other Business Activity

District manufacturing activity grew solidly, and expectations for
future activity strengthened. Factory orders and shipments increased,
and employment growth remained steady with some future hiring planned.
Continued strong commodities-related activity boosted machinery
production, and high-tech and aircraft manufacturing growth remained
strong. Although rising gasoline prices and continued economic
uncertainty restrained activity in several segments, most plant managers
indicated moderate growth in capital spending plans. Growth in
transportation activity picked up slightly, although several contacts
cited driver shortages and higher contractor fuel costs as barriers to
growth. Expectations for future sales were mostly positive, but capital
spending plans among transportation firms were somewhat subdued. The
majority of high-tech services firms reported solid growth in sales, but
the pace of growth slowed somewhat from the previous survey. Several
high-tech contacts noted higher activity in the energy and health care
market, and future capital spending plans were generally positive.

Real Estate and Construction

Residential and commercial real estate activity increased in late
February and March, and expectations were solid heading forward. Housing
starts edged slightly higher, with several contacts in Nebraska noting
increased demand due to the booming agricultural industry. Expectations
for future homebuilding remained positive, and building materials were
generally available. Sales at construction supply firms were stable,
with some contacts noting increased business among multi-family and
remodeling contractors, and expectations for future activity were
favorable. Home sales rose markedly from the previous survey period and
inventory levels fell, which contacts attributed to seasonal patterns,
favorable weather, lower interest rates, and newfound optimism in the
overall economy. Expectations for future home sales continued to
strengthen, and home price levels improved slightly. Mortgage lending
activity was positive and remained above year-ago levels, though
contacts expected refinancing volume to slow somewhat as rates begin to
rise. Commercial real estate activity continued to edge higher, and
expectations for future sales were mostly positive. Vacancy rates
dropped and were expected to fall further. Office prices and rents
remained subdued but were slightly higher than a year ago, and
expectations were largely flat. Several commercial real estate contacts
in Oklahoma noted strong sales due to heavy activity in the energy
industry, while a contact in Missouri expressed continued financing
difficulties.

Banking Bankers generally reported steady or stronger loan demand,
stable or improved loan quality, and increased deposits. Overall loan
demand was steady or improved. Most respondents reported stable to
increased loan demand for residential real estate loans, while loan
demand for commercial and industrial loans and commercial real estate
loans remained steady. Loan demand was stable to weaker for consumer
installment loans. Credit standards remained largely unchanged in all
major loan categories, and the majority of respondents continued to
report increased deposits. Most bankers reported stable or improved loan
quality compared to a year ago, and every banker respondent believed the
outlook for loan quality over the next six months would be steady or
improving.

Energy

Energy activity grew solidly in late February and March, though the
pace of growth slowed slightly from previous surveys. Contacts reported
a sharp slowdown in natural gas drilling, with many noting a shift
towards oil exploration. Natural gas prices reached decade-low levels in
recent months, and most producers expected prices to stay low due to
oversupply and mild weather. Crude oil prices climbed higher from the
previous survey period, which many contacts attributed to continued
Middle East conflict concerns. Contacts reported some shortages in
equipment and labor, particularly for engineers and experienced
technical support, and one producer noted continued delays in receiving
permits for drilling on federal land.

Agriculture

Agricultural growing conditions improved since the last survey.
Scattered rains increased soil moisture levels in many areas, although
drought conditions persisted in some western areas of Kansas and
Oklahoma. Winter wheat development was ahead of normal with most of the
crop upgraded to good condition. Mild winter weather was favorable for
calving and encouraged forage growth, reducing the need for supplemental
feeding. Spring field work began early, and crop prices moved higher.
Low cattle inventories trimmed beef production, and strong domestic and
export demand pushed up cattle and hog prices. Operating loan demand
declined as many producers used cash to buy crop inputs. Farmland values
rose further and were expected to remain at record highs.

Wages and Prices

Prices rose slightly and were expected to continue to increase, but
wage pressures were mostly contained outside of a few skilled positions.
Retailers reported a slight uptick in prices with further increases
anticipated. Manufacturing materials price increases continued and were
expected to increase further, although fewer firms planned on raising
selling prices. Higher prices for construction materials narrowed profit
margins, as the majority of firms were unable to pass these costs
through to customers. Transportation firms reported higher input prices,
and increased food costs continued to impact profit margins and selling
prices for hotels and restaurants. Wage pressures were still generally
contained in most industries, although some firms reported continued
difficulties in obtaining skilled labor.

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

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