Beige Book Report: Kansas City
July 16, 2014
The Tenth District economy expanded modestly in late May and June, and most contacts anticipated stronger growth in the months ahead. Consumer spending rose modestly, with retailers, auto dealers and restaurant contacts reporting slightly higher sales and tourism contacts reporting sharply stronger activity. District manufacturing activity continued to expand, while transportation and wholesale trade contacts noted moderately higher sales. Residential and commercial real estate activity strengthened further, while construction activity ticked up with modest additional gains expected in the coming months. Bankers reported steady overall loan demand, improved loan quality and a slight increase in deposit levels. Crop prices dropped for wheat, corn and soybeans, while cattle and hog prices continued to rise. District energy activity picked up as the number of active oil rigs expanded and natural gas rigs held steady. Prices for raw materials and finished goods rose slightly since the last survey, and wage pressures remained modest outside of some skilled trade positions.
Consumer Spending
Consumer spending rose modestly in late May and early June, and contacts were increasingly optimistic about future sales growth. District retail sales continued to increase, but at a slower pace than during the previous survey period. Retail sales were well-above year-ago levels, and retail contacts anticipated robust sales in the months ahead. Several retailers noted stronger sales of home improvement and building materials, while sales for men's apparel were weak. Automobile sales picked up slightly, with mid-sized cars and SUVs selling particularly well. Automobile sales remained higher than a year ago, and contacts expected strong growth in the coming months. Restaurant sales increased slightly, with sales remaining considerably higher than a year ago. Expectations for future restaurant sales moderated somewhat but still remained solid. District tourist activity improved markedly, in part due to seasonal summer increases, with conditions considerably better than the previous year. Tourism contacts expected stronger activity to continue throughout the summer and early fall months.
Manufacturing and Other Business Activity
District manufacturing activity expanded modestly, although the pace of growth slowed somewhat compared to the previous survey period. Production fell slightly at non-durable goods-producing plants, while production increased for the majority of durable products, except for machinery which decreased considerably. Growth in new orders and employment moderated in June, while order backlogs rose. Expectations for future factory activity remained steady at generally solid levels. Manufacturers' capital spending plans continued to rise and remained higher than a year ago. Wholesale trade and transportation firms reported moderate sales growth from the previous survey, particularly for construction products, while growth in professional and high-tech services activity eased. Wholesale trade, transportation, professional, and high-tech firms anticipated higher future sales activity in coming months. Reduced government spending continued to impact several high-tech firms in the area.
Real Estate and Construction
District real estate activity increased moderately in late May and June, while construction activity rose slightly. Residential home sales expanded modestly, particularly for low- and medium-priced homes which continued to outsell higher-priced homes. Residential home inventories continued to decline, and home prices increased further. Residential real estate contacts expected additional improvement in the coming months, with moderately higher sales and prices. According to builders and construction supply contacts, construction activity continued to expand, although at a slower pace than during the previous survey period. Sales of construction supplies increased moderately, and housing starts were flat. However, builders anticipated starts and buyer traffic to increase modestly in the months ahead. Mortgage activity picked up slightly, but remained lower than a year ago as a decrease in refinancing activity continued to weigh on overall activity. Commercial real estate activity strengthened further, with lower vacancy rates and increased sales, construction and absorption. The commercial real estate market was expected to expand moderately over the next few months.
Banking
Bankers reported steady overall loan demand, improved loan quality, and a slight increase in deposit levels. Respondents reported a minor decrease in demand for residential real estate loans. Most respondents reported steady demand for commercial real estate loans, agricultural loans, and consumer installment loans. Demand for commercial and industrial loans was relatively steady with a slight decrease compared to the last survey. Bankers reported improving 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 largely unchanged in all major loan categories. In addition, respondents reported a minor increase in deposits.
Agriculture
Heavy summer storms in June improved soil moisture for developing crops and pastures but also caused some wind, hail and flood damage. Wet fields delayed the winter wheat harvest in Oklahoma and Kansas, and yields depended on the extent of drought, freeze and hail damage. Despite expectations of a poor wheat harvest in much of the District, wheat prices fell since the last survey period. The corn and soybean crops were in good condition overall, and improved growing conditions led to a drop in prices for both crops. Cattle prices continued to rise, but feeder cattle prices have recently increased much faster than fed cattle prices and narrowed margins for feedlot operators. The cumulative effect of reduced piglet numbers due to the swine virus and strong export demand for pork supported further gains in hog prices, even though pork production forecasts were raised due to heavier dressed weights and higher than expected slaughter in the second quarter.
Energy
District energy activity ticked up in late May and June. Business activity held steady, drilling increased slightly, and expectations for the coming months strengthened further. The number of active oil rigs increased, while natural gas rigs remained basically unchanged. Crude oil spot prices spiked in late June as a result of geopolitical conflicts in the Middle East threatening supply, but have come down somewhat as the threat has weakened. Natural gas spot prices have moderated slightly since the last survey period, but remained above year-ago levels. Energy contacts expected oil and gas prices to stay near current high levels, and contacts reported an increase in planned capital expenditures. Several producers commented on increased drilling costs due to advancing technology, which is currently being offset by high oil prices.
Wages and Prices
Prices grew at a slightly slower pace in most industries, and wage pressures were modest. Retail prices moderated somewhat but still increased over the previous survey period. The pace of growth slowed slightly for manufacturing raw materials and selling prices, but contacts expected further increases in future months. Transportation input prices were flat, and fewer firms raised selling prices, while restaurant menu prices continued to rise due to elevated food costs. Construction materials prices were slightly higher in June, and most builders expected further increases. Wage pressures were modest in most industries, with the exception of manufacturing in which almost half of manufacturing contacts reported raising wages more than normal to attract or retain some workers. Some contacts continued to report a short supply of workers, particularly for drivers, construction, high-tech, and skilled positions.