Beige Book Report: Kansas City
March 3, 2004
The Tenth District economy continued to grow in January and February. Manufacturing activity expanded further, and retail sales excluding autos were up moderately. Housing and energy activity generally maintained a brisk pace, and agricultural conditions remained favorable overall. On the negative side, auto sales fell slightly, and commercial real estate remained weak. Labor markets also remained slack, although some increases in hiring were noted. Wage and price increases were generally minimal, but rising costs of materials appeared to be putting some upward pressure on manufacturers' output prices.
Consumer Spending
Non-auto retail sales in the district were solid in January and
February, as most stores reported moderate increases from a year
ago. Among product categories, sales were particularly strong for
most kinds of apparel and home improvement items. With the recent
solid sales, most store managers were satisfied with inventory levels
and planned typical increases in stocks heading into spring. Most
managers remain optimistic that solid year-over-year sales growth
will continue in coming months, and some stores plan modest increases
in hiring. In contrast to non-auto retail sales, sales of motor
vehicles weakened somewhat in January and February and were below
year-ago levels in much of the district. With the weaker-than-expected
overall sales, inventories at most dealerships were higher than
desired. On the positive side, some dealers reported a pick-up in
used vehicle sales, and nearly all dealers expect total vehicle
sales to improve in coming months. Tourism activity in the district
was generally strong. Rocky Mountain ski areas reported increased
out-of-state visits in February, and activity was especially brisk
over the President's Day weekend. Airport traffic also increased
further in most cities. Heading forward, travel agents generally
report solid bookings for spring leisure travel.
Manufacturing
District manufacturing activity expanded further in January and
February, although rising input costs were putting increased pressure
on many firms' profit margins. Plants generally reported higher
levels of capacity utilization than in previous surveys, and shipments
remained well above year-ago levels. Factory employment and hours
were also reported to be slightly higher than in previous surveys.
Firms remained quite optimistic about future production, due in
part to persistent order backlogs and low levels of finished goods
inventories. In a change from past surveys, contacts in the aircraft
manufacturing sector were also cautiously optimistic. Most manufacturing
materials remained generally available, and managers expect few
changes in lead times heading forward. Many plant managers, however,
expressed considerable concern about the effects of recent sharp
increases in the price of steel and some energy-based products.
Real Estate and Construction
Residential real estate activity continued at high levels in January
and February, while commercial real estate markets remained weak.
Although single-family housing starts edged down in most district
cities, starts generally remained near last year's strong levels.
Moreover, most builders expect home construction to strengthen somewhat
through the spring, over and above the normal seasonal increase.
Realtors reported that home sales were flat to slightly higher in
most district cities following modest declines in late 2003. Home
prices were basically unchanged from previous surveys. Realtors
generally expect continued improvement in home sales and moderate
increases in home prices in coming months. Mortgage lenders reported
a modest rise in mortgage demand, as demand for both new home purchase
loans and refinancings increased slightly. Lenders expect mortgage
demand to continue to edge higher through the spring. Commercial
real estate activity in the district remained weak in January and
February. Office vacancy rates and prices for office space were
largely unchanged in most district cities. On the positive side,
however, sales of office space were up slightly in some cities,
and commercial realtors generally expect modest improvements in
office markets in 2004.
Banking
Bankers report that loans and deposits both held steady since the
last survey, leaving loan-deposit ratios unchanged. Demand for home
mortgage loans stabilized after falling in the last two surveys,
and demand for other loan categories was also little changed. On
the deposit side, slight increases in liquid accounts and small
time deposits were offset by a decline in large CDs. All respondent
banks left their prime lending rates and consumer lending rates
unchanged. A few rural banks tightened lending standards, citing
concerns about local business activity.
Energy
District energy activity maintained a brisk pace in January and
February. The count of active oil and gas drilling rigs in the region
was unchanged from the previous survey and still 30 percent above
year-ago levels. Some producers reported that a shortage of qualified
rig crews was constraining expansion of drilling. Most energy contacts
expect slow but sustained growth in drilling activity in coming
months, as energy prices are expected to remain high.
Agriculture
District agricultural conditions generally remained solid in January
and February, although the drought continued to have some adverse
effects. District bankers reported minimal financial impact on producers
from the mad cow incident last December, and credit reviews generally
showed improvement in farm loan portfolios during the past year
due to strong cattle and grain prices. Farmland values also remained
high in most parts of the district. On the negative side, the winter
wheat crop remained dry. Also, while ample hay supplies kept forage
plentiful, lingering drought conditions caused most cattle producers
to continue to delay expansion of their herds.
Wages and Prices
Wage and price increases generally remained modest in January and
February, but there were more signs of upward price pressures in
manufacturing. As in the previous survey, hiring announcements by
district firms exceeded layoff announcements. Nevertheless, reports
of labor shortages remained relatively scarce outside of the health
care, energy, and trucking industries, and most firms continued
to offer only cost-of-living wage increases. Most retailers reported
flat prices compared with previous surveys and expect little change
in their prices heading forward. Builders reported rising costs
for some materials, including lumber, sheetrock, and steel products,
and they expect continued increases through the spring. In the manufacturing
sector, firms noted sharp cost increases for steel and some energy-based
products. To cover these cost increases, a sizable number of firms
either increased selling prices or plan to do so in coming months.
A couple of firms said they would have to raise output prices just
to stay in business. A few other firms, however, reported they were
able to increase productivity enough to offset the higher costs.