Beige Book Report: Kansas City
March 5, 2014
The Tenth District economy remained stable in January and February and was expected to improve during the next few months. Consumer spending declined moderately as a decrease in automobile, retail, and restaurant sales outweighed an increase in tourism activity. Manufacturing activity expanded moderately, and expectations for future activity remained positive. Construction and residential real estate activity decreased slightly, while commercial real estate activity strengthened. Contacts anticipated stronger real estate and construction activity in the coming months as the weather improves and demand remains strong. Bankers continued to report steady overall loan demand, improved loan quality, and stable deposit levels. Agricultural growing conditions for winter wheat deteriorated, while livestock and crop prices edged higher. Energy activity remained strong, and capital expenditures were expected to increase along with drilling activity. Prices increased slightly for both finished goods and raw materials, with further gains expected in the next few months. Wages rose modestly in most industries, and contacts continued to report difficulty finding workers for some skilled positions.
Consumer Spending
Consumer spending declined moderately in January and February but was expected to increase modestly in the coming months. Contacts noted a variety of reasons for the recent slowdown including typical seasonal patterns, extreme winter weather, regulatory and political uncertainty, and a softening in consumer confidence. Although retail sales fell over the past month, sales remained slightly above year-ago levels. Automobile sales decreased moderately in recent months and fell to levels that were well below one year ago. However, automobile inventories continued to build, and contacts anticipated modest improvement in sales over the next few months. Restaurant sales also dipped sharply in February, but were consistent with year-ago levels and were expected to rise in the next few months. Tourism activity was significantly stronger than one year ago, with hotel occupancy rates and room rates both higher. Increased snowfall improved skiing conditions in the District and led to more ski-related tourism.
Manufacturing and Other Business Activity
Manufacturing and transportation activity increased moderately since the last survey period, while other business activity was unchanged. Manufacturing activity picked up for both durable goods and nondurable goods, with production, shipments and new orders expanding at a faster pace among durable goods manufacturers. Overall, manufacturing activity and capital expenditures remained above year-ago levels, and expectations for the future were positive. Contacts in professional and high-tech services, healthcare services, and wholesale trade reported roughly stable sales since the last survey period and anticipated activity to pick up in the coming months. Transportation companies reported stronger sales in February, and contacts were increasingly optimistic about future activity.
Real Estate and Construction
Construction and residential real estate sales decreased slightly, while commercial real estate activity strengthened from the previous survey period. Residential sales declined slightly, while inventories remained low and fell further. Low- and medium-priced homes continued to drive sales, while higher-priced home sales remained sluggish in most of the District. Residential realtors reported additional home price gains, and expected residential real estate activity to improve in the near-term as demand increases due to seasonality. Builders reported that the number of starts was flat during the survey period, but construction activity was expected to strengthen in the coming months, with prices and buyer traffic both expected to increase. Mortgage activity fell slightly compared to the last survey period and compared to a year ago, but was expected to increase in the coming months as a rise in home purchase loans was anticipated to outweigh the decrease in refinancings. Commercial real estate contacts reported a decline in vacancy rates, a slight increase in absorption, and higher sales. Commercial real estate construction softened slightly but was still up over last year and was expected to increase in the coming months.
Banking
Bankers reported steady overall loan demand, improved loan quality, and stable deposit levels in February. Most respondents reported steady demand for commercial and industrial loans, commercial real estate loans, consumer installment loans, and agriculture loans. Demand for residential real estate loans declined during the survey period. Bankers reported improved loan quality compared to a year ago, and all bankers expected the outlook for loan quality to either improve or remain the same over the next six months. Credit standards remained unchanged in all major loan categories, and respondents reported stable deposits.
Agriculture
Crop growing conditions deteriorated, while livestock prices strengthened since the last survey period. Slightly more than half of the winter wheat crop was rated in fair to poor condition as scattered snowfalls provided only marginal soil moisture. Crop prices edged up from recent lows due to an uptick in export demand and concern that South American corn and soybean production would be lower than previously expected. Feeder cattle prices rose further with historically low cow inventories, and strong export demand supported higher fed cattle prices. Hog prices rose amid an intensifying swine virus outbreak that was expected to constrain pork supplies. In addition, production costs for livestock feeders edged down due to lower feed prices. Agricultural bankers indicated that farmland price appreciation moderated from the rapid pace seen the past few years, and most expected values would level off in 2014.
Energy
District energy activity remained solid in January and February and was expected to remain steady in the coming months. Oil rigs increased slightly in the District, particularly in Oklahoma and Colorado. Natural gas rigs edged down despite the surge in natural gas spot prices and record-high withdrawals from storage. Although futures prices for March and April natural gas contracts have risen recently, energy contacts expected natural gas prices to decrease slightly in the coming weeks as storage is restocked. Crude oil prices were expected to remain steady. Propane prices increased significantly for many consumers due to already low propane stocks and unusually cold weather. Capital expenditures were projected to increase in the coming months, particularly in drilling for oil and natural gas liquids.
Wages and Prices
Prices of finished goods increased modestly, while raw material prices rose moderately in January and February. Wages ticked up and were expected to continue to move higher in the months ahead. Retail, automobile, restaurant and manufacturing contacts noted price increases for both inputs and finished products. However, raw material prices were reportedly rising at a faster pace. These contacts anticipated additional price increases in the months ahead. Builders also reported an uptick in the price of construction materials, particularly roofing. Wages rose modestly in most industries, with transportation and automobile contacts reporting larger increases. Retail and restaurant respondents expected wages to increase at a faster pace over the next six months after minimal gains in recent months. Contacts in the professional and technical services, construction, and transportation industries expected the largest wage gains in the coming months. Some contacts continued to report difficulty finding skilled workers including technicians, engineers, construction trade laborers, and experienced supervisors.