WASHINGTON (MNI) – The following is the of 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 improved slightly in late August and
September. Retailers and auto dealers reported stronger sales and
anticipated further gains in the months ahead. Sales were weaker at
restaurants and hotels, leading to pessimism in these industries as the
holiday season approaches. Manufacturing activity rose at durable goods
factories, and the high-tech services industry experienced strong
growth, while transportation activity was flat. Residential and
commercial real estate and construction contacts continued to report
weak conditions. Bank deposits continued to increase, while loan demand
and loan quality deteriorated slightly. Crop conditions varied across
the District, but farm income expectations remained strong. The energy
sector expanded further with production increasing for oil, natural gas
and coal. As input prices continued to increase, more contacts expected
to raise prices in the coming months. But wage pressures eased from
already low levels.

Consumer Spending.

In late August and September, consumer spending increased in the
retail and auto sectors but declined slightly in the restaurant and
travel sectors. District retailers reported strong sales and expected
additional increases during the next three months. Luxury goods, such as
jewelry and custom-upholstered furniture, sold particularly well. One
contact noted an uptick in sales among both high-end and low-end
customers, but reported that those in the middle were holding back. Auto
sales were also higher than expected despite several contacts describing
low consumer confidence due to economic and political uncertainty. Many
auto dealers reported difficulty finding qualified sales people and
technicians. Restaurant sales were lower than anticipated but were
expected to remain steady over the next three months. Despite slightly
lower average room rates, hotel occupancy decreased, and District hotel
owners expected further declines in the coming months.

Manufacturing and Other Business Activity.

Manufacturing and high-tech service activity continued to grow
during the survey period, while transportation activity was flat.
Manufacturing activity increased at durable goods factories,
particularly firms producing aircraft and computer equipment. These
increases helped to offset a slight decline in activity at nondurable
goods plants. Shipment and new order volumes edged up during the survey
period, and firms expected both to improve over the coming months. With
an overall increase in activity, firms hired additional workers and
slightly increased employee hours. Manufacturers continued to anticipate
higher capital spending over the next six months, but these expectations
were dampened somewhat compared to the previous survey. The high-tech
industry reported steady growth in sales, and firms expected activity to
be strong over the next three months. Transportation activity was flat
during the survey period, and contacts reported continued difficulty
finding skilled technicians and drivers.

Real Estate and Construction.

Residential and commercial real estate activity remained weak
during late August and September. Residential sales were flat during the
survey period, and home prices were down. Real estate contacts expected
sales to be much slower in the coming months, but many attributed this
to the seasonal slowdown. Residential mortgage lenders continued to
report an increase in refinancing activity due to low mortgage rates,
but very little new loan activity. Construction supply firms saw sales
fall during the survey period, and they expected upcoming sales to be
weak due to the seasonal slowdown of the construction industry. Housing
starts were flat, and builders did not foresee activity increasing in
the next three months. Multi-family building projects were the only area
of reported growth by commercial construction contacts. Commercial real
estate sales and prices continued to decline, and vacancy rates were
flat. District contacts expected commercial prices and rents to decline
further in the coming months. Developers reported no change in their
access to credit. Banking. In the recent survey period, bankers reported
increased deposits, but somewhat weaker loan demand and a slight
deterioration in loan quality. Overall loan demand decreased slightly as
demand for consumer installment loans declined, while demand for
commercial and industrial loans, commercial real estate loans, and
residential real estate loans was marginally weaker. Credit standards
remained largely unchanged in all major loan categories, and deposits
increased for the sixth straight survey. Bankers reported a minor
deterioration in loan quality compared to a year ago but anticipated
some improvement in the outlook for loan quality over the next six
months.

Agriculture.

Agricultural conditions continued to vary across the District.
Northern portions of the District, which received ample rain, expected
bumper crops, while crops in the southern portions of the District
continued to suffer under drought conditions. Most of the corn and
soybean crops in Nebraska were rated in good or better condition as
harvest began, while Kansas expected yields well below average due to
drought. Winter wheat planting was delayed in some areas of Oklahoma as
farmers waited for rain, but planting was on schedule in Kansas and
Nebraska. Despite recent downturns in crop prices, farm income
expectations remained strong. Robust export demand supported livestock
prices, but high feed costs trimmed profit margins. Farm loan demand
remained weak as capital spending slowed further and some producers paid
cash for higher input costs. District contacts indicated that prices of
farmland sold at auction continued to post record highs.

Energy.

Energy activity continued to expand in late August and September,
and activity was expected to grow further over the next three months.
The number of active drilling rigs for both oil and natural gas
increased in the District. Oklahoma and Wyoming showed the largest
growth in rig counts, which helped to offset slight decreases in New
Mexico and Kansas. Contacts continued to report that future drilling
activity was being constrained by a lack of qualified labor and the
availability of equipment and supplies. Contacts reported having a
difficult time attracting experienced skilled workers due to increased
competition among firms. The price of crude oil was expected to decrease
over the next three months, but natural gas prices were expected to
increase as winter demand increases. Coal production increased slightly
during the survey period.

Wages and Prices.

District contacts reported higher prices for both inputs and
finished goods, but wage pressures eased from already low levels. More
manufacturers reported increases in raw material prices and finished
goods prices in September, and most expected further increases over the
next six months. Input prices also rose for building materials,
especially roofing materials. Prices held steady at retail stores but
were expected to increase in the coming months. Restaurant contacts also
anticipated raising menu prices as food prices continued to climb.
Contacts from several industries reported difficulties finding qualified
workers for skilled positions, but fewer firms than in recent surveys
reported increasing wages in response. Across all industries, most
contacts expected wage increases to remain stable over the next three
months.

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

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