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Beige Book Report: Kansas City

March 17, 1999

The district economy continued to grow moderately last month. Retail sales again posted solid gains, and manufacturing registered its first improvement in months. Construction activity eased slightly due to colder weather but remained well above last year's pace. Energy activity declined as prices took another turn for the worse. In the farm economy, the winter wheat crop was in good condition, but hog farmers continued to suffer from low prices. Labor markets remained very tight in most of the district, with wage pressures - especially in the construction sector - increasing somewhat from the previous survey. Prices remained flat at the retail level and mixed for manufacturing materials, while prices for some construction materials began to rise.

Retail Sales
The momentum created by stronger than expected retail activity during the holiday and post-holiday seasons continued in February, as sales compared with both the previous month and previous year again posted solid gains. At least part of the robust activity was a result of pre-spring clearance sales. Many stores have now begun increasing stock levels again to get ready for the spring season, and further expansions are planned in coming months. With consumers remaining predominantly upbeat about the economy, most retailers expect continued strong sales. Automobile sales remained somewhat slow in February, especially for small passenger cars, leaving sales below year-ago levels. Truck and SUV purchases continued to rise, however, keeping dealers fairly content with current inventory levels. Dealers expect an upturn in overall vehicle sales within the next few months unless credit conditions change considerably.

Manufacturing
Tenth District manufacturing activity improved slightly last month but is still rather weak overall. Nearly all plants were operating at medium to high levels of capacity, which was an improvement over our previous survey but still well below the activity level of last summer. Manufacturing materials remained generally available, with virtually no variation in lead times and no major difficulties expected in the near future. Managers continued to trim inventories as fears of reduced exports and increased imports heightened after the Brazilian currency devaluation in mid-January. Inventory cutbacks were not as sharp as in the previous survey, but many managers remained unsatisfied with current stock levels and plan to keep trimming over the next few months.

Housing
Construction activity eased slightly last month due to colder weather, but starts were still well above year-ago levels. Home sales also weakened a bit in February, pushing inventories of unsold homes slightly higher. New home purchases continued to outpace last year, however. Builders expect strong expansion of construction activity over the next three months. Mortgage demand remained flat in February, dropping slightly below year-ago levels. Small increases in interest rates may have helped slow both refinancing activity and new home purchases. But mortgage bankers concur with developers that activity will soon pick up and lenders therefore believe that loan demand is likely to grow much faster in the near future.

Banking
Bankers report that loans increased while deposits fell last month, increasing loan-deposit ratios. Demand increased for consumer loans, home equity loans, commercial real estate loans, and agricultural loans. On the deposit side, demand deposits, NOW accounts, and large time deposits all decreased slightly. All respondents left their prime lending rates unchanged, and the majority left consumer lending rates unchanged last month. All banks expect to leave the prime rate unchanged, and most expect to hold consumer lending rates steady in the near term. A few banks reported a tightening of lending standards on agricultural loans because of concerns over low commodity prices.

Energy
District energy activity continued to decline in February, as prices took another turn for the worse. The rig count fell 8 percent, following an even bigger drop in January, to 44 percent below year- ago levels. After rising moderately in January, the price of West Texas Intermediate crude oil fell 2 percent in February, as world demand failed to pick up in the wake of the Brazilian crisis. At $11.96 per barrel, oil was 26 percent cheaper than a year ago. Natural gas prices also fell after recovering slightly in January. Mild weather and a glut of gas on the market led to a 5 percent price decline in February, to 18 percent below the previous year.

Agriculture
The district's winter wheat crop was in good condition, although unusually warm weather led to early development, leaving the crop open to damage from a late freeze. The existing wheat pasture was in good shape. Hog producers in the district continued to struggle due to low market prices and many small and mid-sized producers have liquidated their herds. The remaining producers are expected to hold out another six months for higher prices. District farmland values remained stable, although sales volume was down. Landowners are being more flexible with rent payment schedules, but district cash rents held steady. District bankers indicated that credit reviews of agricultural borrowers look good. In most cases, less than 5 percent of the banks' agricultural loans will not be renewed, about the same percentage as a year ago. However, district ag bankers are requiring more of their customers to obtain federal loan guarantees this year, reflecting some concern about repayment difficulties in the year ahead.

Wages and Prices
Labor markets remained very tight in most of the district last month, with wage pressures--especially in the construction sector--increasing somewhat from the previous survey. Retailers continued to have problems finding entry-level workers and sales associates. Labor shortages among manufacturers were less widespread than in previous surveys, but general laborers were still in need. Builders faced the biggest difficulties obtaining workers, despite a slight easing in the overall construction market. All types of construction workers were in high demand, especially skilled tradesmen such as framers, bricklayers, and carpenters. Builders subsequently felt the biggest increase in wage pressures in February, although retailers were also forced to increase pay more rapidly than in the recent past. Thanks to a reduction in labor tightness among manufacturers, wage pressures in that sector subsided somewhat compared with previous surveys. Retail prices held steady in February and are expected to remain stable in the near future. Prices of manufacturing materials were mixed. Steel prices continued to drop, but rubber and plastic prices both increased. The price of some construction materials, such as insulation and sheetrock, also edged up, and further small increases for some materials such as drywall are expected in the near future.