Beige Book Report: Kansas City
January 15, 2014
The Tenth District economy held steady in December after expanding modestly during the previous survey period. Consumer spending was mixed due to a slowdown in automobile sales and hotel occupancy, but retail sales increased somewhat. Manufacturing activity declined slightly, while expectations for future activity improved. Activity in the residential real estate sector continued to slow slightly, while commercial real estate activity remained mostly flat. Both residential and commercial real estate activity, however, were above the levels this time last year. Bankers reported steady overall loan demand, improved loan quality and stable deposit levels. Agricultural growing conditions for winter wheat improved in late November and December, but low crop prices limited farm income expectations. Energy activity in the District rose modestly as contacts reported more drilling, hiring, and capital expenditures over the last month. Wage pressures edged down since the last survey, even though a mild rise in labor shortages was reported. Prices for final goods held steady despite an increase in the price of raw materials.
Consumer Spending
Consumer spending was mixed in late November and December as automobile sales and hotel occupancy declined, while retail sales slightly increased. Most contacts reported sales activity as lower than they had expected although retail sales increased compared to the prior month and were higher relative to the same time last year. However, district retailers had expected higher levels and attributed the lower than expected sales to a shorter and slower holiday shopping season, and harsh weather conditions. Sales of appliances and lower-priced items continued to be strong, while sales of hardware, outdoor, as well as higher-priced items lagged. Auto sales declined and were lower than anticipated, but auto dealers foresaw higher sales in the coming months. The strongest sales came from light pickups, small SUVs, and crossovers. Auto inventories increased moderately from a month ago, and dealers expected an elevated level going forward. Restaurant sales were unchanged and remained steady compared to their levels last year. Restaurant contacts restated their concern about increasing food prices and anticipated a further rise in the near future. Tourism activity grew slightly since the last survey and increased moderately compared to the same time last year. Occupancy and room rates were down in the survey period, but held steady compared to year-ago levels.
Manufacturing and Other Business Activity
Manufacturing and transportation activity fell slightly in December, while sales at high-tech service firms remained stable. Durable manufacturing production, shipments and new orders decreased modestly since the last survey. Nondurable goods manufacturing activity also decreased slightly, with the exception of new orders. Some contacts cited poor weather, and continued fiscal and regulatory uncertainty as reasons for the December slowdown. However, activity in the manufacturing sector remained well above year-ago levels and expectations for future activity rose modestly, with the majority of contacts expecting to increase or maintain current levels of employees and capital expenditures. Sales at high-tech companies held at previous reporting period levels, with most contacts expecting higher levels of activity in the future. Transportation companies reported slightly lower sales compared to the previous month and to the previous year though expectations for future activity were also little changed.
Real Estate and Construction
Activity in the residential real estate sector showed signs of a slight decline, while commercial real estate activity remained mostly flat, with the exception of construction, from the previous survey period. Residential realtors reported strength in sales of low to mid-range priced homes, but condos and higher-end home sales were sluggish in parts of the District. Residential and commercial real estate prices maintained their upward trend and they were expected to rise further. Housing starts remained unchanged in late November and December, though they were higher compared to last year. Contacts anticipated positive future home building. Some builders indicated difficulties finding qualified labor and said it impeded their ability to start new projects. Construction supply companies' sales slowed, but firms were optimistic about future sales. Mortgage activity was again lower this period and also as compared to a year ago, caused primarily by a decline in refinancing. However, lenders expected mortgage activity to increase in the future. Commercial real estate construction rose, and vacancy rates remained low. Commercial real estate prices and rents were also higher, and contacts expected the rise to continue.
Banking
Bankers reported steady overall loan demand, improved loan quality and stable deposit levels in December compared to the prior survey period. Respondents reported increased activity in agricultural loans, and steady demand for commercial and industrial loans and commercial real estate loans. Demand for residential real estate loans declined further during the survey period. Bankers remained positive concerning loan quality compared to a year ago, and nearly all bankers anticipated loan quality to either improve or remain the same in the near future. Credit standards remained unchanged in all major loan categories, along with stable deposits reported.
Agriculture
Agricultural growing conditions improved in late November and December, but low crop prices limited farm income expectations. The winter wheat crop was rated in mostly good condition with winter storms providing soil moisture and protective snow cover. However, wheat prices fell slightly since the last survey period, and corn and soybean prices remained at their lowest levels since 2010. Some farmers were holding fall crop inventories rather than selling at current prices. Lower income prospects boosted demand for farm operating loans and dampened farm capital spending at year-end. In the livestock sector, weaker demand for pork from Asian markets placed downward pressure on hog prices. While cattle prices were relatively flat, profit margins for cattle producers may improve as better pasture conditions lessen the need for supplemental feed.
Energy
Energy activity rose modestly in late November and December. Contacts indicated greater drilling and business activity. Capital expenditures in the energy sector also increased modestly. Hiring by contacts in the sector grew at a stronger pace compared to the prior survey period. The number of oil rigs in District states increased slightly. Natural gas prices increased during the survey period, but were expected to decline in the coming months. Oil prices also increased slightly and were anticipated to hold steady. Wyoming's coal production increased modestly, but remained lower than year-ago levels.
Wages and Prices
Contacts reported prices for most raw materials were on the rise, yet prices for final goods were mostly unchanged. In general, wage pressures edged down in late November and December, despite a mild rise in labor shortages. However, wage pressures were noted for some positions including skilled construction positions, software developers, and technicians. Retailers reported a slight increase in prices and expected modest price growth in the coming months. The prices manufacturers received for final goods were lower, though the prices they paid for raw materials were higher than in the last survey period. Most manufacturing contacts foresaw both of these prices rising in the months ahead. Transportation companies also saw their input prices rise while keeping their prices mostly unchanged. Builder input prices were steady over the last month. Restaurant menu prices went up only slightly last month, but contacts anticipated moderate price growth in the near future. Restaurants continued to see a rise in food costs, and expected the trend to continue.