Beige Book Report: Kansas City
July 17, 2013
The Tenth District economy grew modestly in June, and expectations for future activity improved slightly. Tourism and restaurant sales edged up, while retail and automobile sales were steady since the last survey. District manufacturers reported slowdowns in production and shipments, principally due to regional storms over the survey period. Residential real estate activity continued to be strong, while commercial real estate activity marginally increased. Overall banking conditions improved slightly, with marginally higher loan demand and generally better loan quality. Agricultural growing conditions improved somewhat with recent rains, which led to a drop in expected harvest prices for corn and soybeans. District drilling and mining activity was flat, though energy contacts expected stronger oil and natural gas drilling in coming months. District contacts from most sectors reported little change in prices for food, building supplies and raw materials. Labor shortages ticked up, but wage pressures remained modest.
Consumer Spending
Consumer spending edged up in June, with increased tourism and restaurant spending, but little change in automobile and retail sales. Contacts in most sectors expected consumer spending to improve over the next three months. District retail sales were flat over the survey period. Purchases of large ticket items, such as appliances, slowed relative to lower-priced goods. Tourism activity and hotel occupancy rates both rose relative to the last survey period, but were similar to levels a year ago. Average daily room rates were unchanged and were expected to remain the same in the coming months. Restaurant sales ticked up since the last survey, and respondents expected similar levels of activity over the next few months. Automobile dealers reported sales were steady and above year-ago levels, but inventories continued to increase. The majority of dealers still expected faster sales growth in the coming months.
Manufacturing and Other Business Activity
Manufacturing activity contracted slightly in June, while high-tech activity rose and transportation was flat. A number of factories reported production delays and shipment interruptions due to recent regional storms and flooding. Activity was especially weak among producers of food and machinery. However, expectations for future factory activity continued to increase. High-tech service firms reported that sales improved during the survey period, but activity was expected to be flat over the next three months. Transportation activity and capital expenditures were unchanged in June compared to the previous survey period. Transportation firms reported difficulty finding qualified drivers, and some anticipated increased costs due to compliance with the Affordable Care Act.
Real Estate and Construction
Residential real estate activity remained robust, while commercial real estate activity ticked up in June. Residential real estate sales continued to rise. Prices continued on an upward trend while inventories were somewhat lower compared to the prior survey period. Contacts in some District markets reported that low inventories slowed sales and put upward pressure on prices. Views on the likely impact of rising interest rates were mixed. Some contacts expected that recent increases in mortgage rates would encourage more people to buy before rates increased further, while others anticipated a reduction in activity. Recent storm damage to homes in some parts of the District was also expected to add to the demand for housing in those areas. Residential builders reported solid construction activity, with expectations for further modest growth. Commercial real estate activity ticked up during the past month, as construction activity continued to strengthen. Sales prices held steady, and vacancy rates fell further in some areas. Contacts expected stronger activity in coming months, but several noted uncertainty around rising interest rates.
Banking
Bankers reported slightly stronger overall loan demand, moderately improved loan quality, and slightly lower deposit levels. Respondents reported stable demand for commercial real estate and consumer installment loans. Demand for commercial and industrial loans increased, while demand for residential real estate loans declined. Nearly all bankers reported slight improvements in loan quality compared to a year ago. They also expected loan quality to marginally improve over the next six months. Credit standards remained unchanged in all major loan categories and respondents reported slightly lower deposits.
Agriculture
Agricultural production expectations improved somewhat with recent rains, but varied regionally. Summer storms eased dry conditions in eastern parts of the District, though drought persisted in western regions. The winter wheat harvest was underway or complete in Oklahoma and Kansas with highly variable yields depending on the extent of drought and freeze damage. Despite expectations of a poor wheat harvest in some areas, wheat prices fell since the last survey period. The corn and soybean crops, however, were rated in mostly good or better condition with the improved soil moisture. Although corn and soybean prices remained historically high, improved growing conditions led to a drop in expected harvest prices for both crops. Feedlot operators struggled with high input costs and falling cattle prices, but losses narrowed for hog producers after a rebound in hog prices. Cropland values moved higher but were expected to hold steady during the growing season.
Energy
District energy activity held steady over the survey period. Overall, drilling activity remained stable for both oil and natural gas in June. With oil prices elevated and natural gas prices low, drilling activity was expected to continue to shift away from natural gas to oil. However, energy contacts expected oil and natural gas drilling to accelerate over the next few months. Wyoming coal production was unchanged in June, but demand has weakened over the past year. Ethanol production continued to edge higher, and inventories trended down as profitability in the sector improved modestly.
Wages and Prices
Wage pressures remained low during June, and prices were generally unchanged during the survey period. The percentage of firms reporting labor shortages increased slightly, but recent wage increases remained modest. Firms reported strong demand for long haul drivers, delivery drivers, skilled auto technicians and hotel housekeeping staff. Retail prices were steady during June, and retailers did not expect to raise prices over the next three months. Menu prices and food costs were flat during the survey period. Food costs were expected to rise over the next three months, but most restaurants did not anticipate passing the increases through to consumers. Raw material prices for manufacturers were unchanged in June, but expectations did move up moderately. Finished goods prices increased slightly, but manufacturers projected future finished goods prices would be lower. Construction supply firms and builders reported that prices for construction materials were unchanged and neither expected prices to rise over the next three months. Similarly, transportation firms responded that input prices were flat.