Beige Book Report: Kansas City
October 24, 2001
The Tenth District economy weakened in September and early October. Retail sales dropped immediately following the terrorist attacks and recovered only partially in the next several weeks. In addition, the slump in manufacturing worsened, residential construction activity slowed, and commercial real estate activity declined. Energy activity also fell somewhat after increasing most of the year. In the farm economy, fall crop yields were mixed and weaker cattle prices trimmed profits for cattle feeders. District labor markets eased, as previously scheduled job cuts took effect and more layoffs were announced. Wage pressures remained minimal outside of a few skilled occupations. Retail prices and prices for construction and manufacturing materials were largely stable, while manufacturing output prices edged down.
Retail Sales
Retail sales declined from the previous survey and were below year-ago
levels in most of the district. Many stores shut down on the day
of the terrorist attacks and most experienced slower than normal
sales the rest of that week. Sales had recovered somewhat by the
following weekend but remained below normal in most places through
early October. High-end retailers generally suffered the biggest
declines in sales, while large discount stores and grocery stores
fared better. Retailers expect activity to remain somewhat subdued
through the holiday shopping season. Motor vehicle sales in September
were strong in some areas due to attractive financing packages,
but remained soft in others due to consumers' unease about the economy.
Dealers expect sales to weaken once the consumer incentives come
to an end.
Manufacturing
District factory activity weakened again after showing some signs
of improvement in August. A greater percentage of firms reported
year-over-year declines in production, shipments, and most other
indicators of factory activity. In addition, more manufacturers
reported declines in employment than in previous surveys. Layoffs
were announced in a variety of industries, but especially among
aircraft manufacturers and parts suppliers. Several firms mentioned
that the biggest immediate impact of the terrorist acts was a reduction
in executive air travel, which they feared could disrupt sales.
Capital expenditures at district plants continued to fall along
with expectations of future activity. Most plants were trimming
inventories in September and planned to continue doing so. No significant
material shortages were reported, and supplier delivery times were
little changed despite some disruptions immediately following the
terrorist attacks.
Real Estate and Construction
Residential construction activity eased in September and early October,
and commercial real estate markets continued to weaken. Housing
starts were down in most cities, with some cities reporting considerable
declines. Many builders reported a dropoff in customer interest
following the terrorist attacks and some said a few customers cancelled
orders. Some builders, however, reported that demand was slowing
even before the attacks. Home sales were markedly below year-ago
levels in some cities, and many realtors reported reductions in
buyer traffic. Mortgage demand held steady in September as increased
refinancing activity made up for fewer home purchase applications.
Commercial real estate activity declined somewhat further, with
construction, rents, and absorption all showing more weakness. Vacancy
rates were higher than a year ago in nearly all district cities,
and slightly higher than in the summer. Commercial lending standards
were reported to be slightly tighter than in the previous survey.
Banking
Bankers report that loans decreased and deposits increased since
the last survey, reducing loan-deposit ratios. Demand fell for commercial
and industrial loans, consumer loans, and commercial real estate
loans. A number of bankers attributed the weaker demand for these
categories to increased caution on the part of borrowers, some of
whom are making a greater effort to pay down their loans. On the
deposit side, increases in demand deposits outweighed declines in
large CDs. All respondent banks reduced their prime lending rates
since the last survey, and almost all banks decreased their consumer
lending rates. A few banks tightened their lending standards, citing
the slowdown in the economy and the increase in uncertainty.
Energy
Energy activity in the district declined in September and early
October. The region's count of active oil and gas drilling rigs
continued to fall from a 14-year high established in July, reaching
a six-month low in the first week of October. Some producers attributed
the decline in drilling to the steep fall in natural gas prices
since last winter, which has discouraged the drilling of marginal
wells. District sources expected natural gas prices to remain fairly
low through 2002, but believe long-run prospects for the energy
industry are still favorable.
Agriculture
Fall crop yields were mixed across the district, and district cattle
feeders suffered some decline in profits. With the fall harvest
almost complete, corn and soybean yields in the southern part of
the district were below normal due to adverse weather over the summer.
Elsewhere, yields were average or better. Rainfall came in time
for planting of the district's winter wheat crop, which is generally
ahead of schedule. Large supplies of market-ready cattle put downward
pressure on finished cattle prices, trimming profits for district
cattle feeders. Bankers reported that small business activity in
rural areas was sluggish, continuing the slowdown that began prior
to the terrorist bombings.
Wages and Prices
District labor markets eased in September and early October, as
sizable job cuts were announced and previously announced layoffs
took effect in many parts of the district. Employers were reported
to be taking more time in screening and hiring new workers, with
many having a waiting list of applicants for the first time in several
years. Several retailers said they would not be hiring as many temporary
holiday workers as in previous years. Worker shortages persisted,
however, for nurses and skilled construction trades. Wage pressures
remained minimal outside of these fields. Several contacts reported
that there has been a definite shift in unions' focus from wages
to working conditions over the last six months. Retail prices were
flat for most items, although several stores lowered prices to clear
excess inventory. Most store managers expect flat prices through
the remainder of the year. In the manufacturing sector, input prices
were flat and output prices fell slightly. Both input and output
prices are expected to edge up in coming months. Builders reported
that prices for most construction materials were stable.