Beige Book Report: Kansas City
June 4, 2014
The Tenth District economy expanded modestly in late April and early May with solid expectations for growth during the coming months. Consumer spending rose slightly at retailers and auto dealers, while restaurant and tourism contacts expected a summer rebound in activity. District manufacturers reported a further increase in production, transportation firms noted increased sales, and business activity at other services companies continued to grow steadily. Residential real estate activity remained steady alongside an increase in home prices and housing starts. Commercial real estate activity improved further with additional declines in vacancy rates. Bankers reported increased loan demand, stable loan quality and a slight decline in deposits. Farm income expectations fell for crop producers, but livestock operators reported improved profits. District energy activity remained stable and was expected to expand in the coming months with an increase in hiring and capital investments. Prices rose modestly, and wage pressures increased for some skilled trade positions in the manufacturing, construction, transportation, and energy sectors.
Consumer Spending
Consumer spending increased at a slower pace in late April and early May, but contacts were more optimistic about future sales growth. Retail sales increased modestly from the previous survey and were up slightly from a year ago. Several retailers noted stronger sales of home improvement and building materials. Expectations for future sales climbed higher and store inventories continued to increase moderately. Auto sales grew at a slightly slower pace than in March but remained above year-ago levels. Sales were expected to improve in future months, and contacts said small, mid-sized family vehicles sold particularly well. Auto inventories rose but at a slower rate than earlier this year. Restaurant sales slowed somewhat, but activity was considerably higher than a year ago and expectations for future sales were strong. District tourist activity slowed somewhat in late April and May, and was lower than a year ago. However, most tourism contacts expected modest increases in activity heading forward.
Manufacturing and Other Business Activity
District manufacturing activity expanded at a solid pace in late April and early May. Production was strongest at durable goods-producing plants, particularly among machinery and construction materials manufacturers. New orders rose marginally and employment also increased. Expectations for future factory activity moderated slightly from previous months, but were generally positive. Manufacturers’ capital spending plans were healthy and remained higher than last year. Wholesale trade and transportation firms noted solid sales growth from the previous survey, and expectations for future activity moved slightly higher, particularly among transportation contacts. Activity at professional and high-tech firms continued to grow, with sales expected to rise further in coming months. However, one high-tech firm noted a sharp revenue decline due to reduced government defense spending.
Real Estate and Construction
Real estate and construction activity increased modestly in late April and early May, with stronger seasonal activity anticipated in the coming months. Construction supply and builder contacts reported stronger activity compared with both the previous survey period and last year. Builders reported moderate growth in the number of starts and potential buyer traffic, and housing starts were expected to rise over the next few months. Residential realtors reported steady home sales since the last survey period but expected a modest increase in sales due in part to seasonal factors. Residential home inventories continued to drop and home prices increased further. The market for low- and medium-priced homes remained more robust than the market for higher-priced homes. Mortgage activity was moderately lower than a year ago due to a decline in refinancing activity, but increased since the last survey and was expected to increase in coming months. Commercial real estate contacts continued to report a decline in vacancy rates, an increase in absorption, higher sales, and strengthening construction activity. Commercial real estate prices, sales, and construction were expected to increase moderately in the coming months.
Banking
Bankers reported an increase in overall loan demand, stable loan quality and a slight decrease in deposit levels in late April and early May. Respondents reported moderately stronger demand for commercial and industrial loans and residential and commercial real estate loans. Bankers also noted a modest rise in demand for consumer installment and agricultural loans. Bankers reported stable loan quality compared to a year ago, and nearly all bankers expected the outlook for loan quality to either improve or remain the same over the next six months. Credit standards remained largely unchanged in all major loan categories, and respondents reported a minor decline in deposits.
Agriculture
Farm income prospects for crop producers dimmed since the last survey period, while profitability in the livestock sector improved. Winter wheat growers were concerned that the poor condition of the crop would limit profits despite an upswing in wheat prices. Corn and soybean prices were steady since the last survey period but remained well below year-ago levels. Spring planting prompted increased demand for operating loans to pay for crop inputs. In contrast, profit margins for livestock operators improved further as low cattle and hog supplies pushed prices higher and feed costs remained flat. Strong demand for grazing pastures supported a modest rise in ranchland values, but cropland values generally held steady. Farm loan repayment rates dipped below year ago-levels, and District bankers reported a slight rise in carry-over debt relative to last year.
Energy
District energy activity held steady in April and early May. Contacts reported stable drilling and business activity during the survey period with positive expectations going into the summer season. The number of active oil drilling rigs increased, particularly in Oklahoma and New Mexico. In contrast, the number of active natural gas drilling rigs decreased due to continued low prices and high storage levels. The price of crude oil has remained stable but high, and was not expected to deviate in the near future. The price of natural gas was still above year-ago levels but was expected to decrease over the next couple of weeks due to typically weaker demand in the summer. Current high oil prices continued to maintain profits and drive up capital expenditures. Hiring in the energy sector slowed since the last survey period, but was expected to pick up in the next several months.
Wages and Prices
Prices continued to rise in most industries, and wage pressures increased slightly, particularly for skilled positions. Retail prices rose further, although the pace of growth was expected to slow in coming months. Prices of manufacturing materials increased moderately compared to the previous period, and more firms began to raise selling prices. Transportation companies reported rising input and selling prices, and menu prices continued to increase for restaurants due to elevated food costs. Construction materials prices moved slightly higher, particularly for drywall and roofing, and were expected to increase further. Wage pressures increased slightly in some industries, particularly those noting difficulties finding qualified labor, such as truck drivers, machinists, high-tech, and other types of skilled workers. Several contacts commented on the increased competition for workers due to the improving labor market.