Beige Book Report: Kansas City
October 15, 2014
The Tenth District economy grew modestly in late August and September, and most contacts were optimistic about future activity. Consumer spending was up moderately despite some sluggishness at restaurants and hotels, and expectations for future sales were mostly positive. District manufacturing activity grew modestly, and wholesale trade firms reported improved sales. District real estate activity increased slightly, and activity in the energy sector continued to expand. Transportation, professional, and high-tech firms reported slower growth relative to the previous survey. Bankers reported steady loan demand, better loan quality, and stable deposits. In agriculture, crop conditions remained solid in the District, but lower crop prices weighed on the outlook for farm incomes. Prices grew more slowly in most industries, while some firms reported increased wage pressures as well as labor shortages for specific positions.
Consumer Spending
Consumer spending grew at a solid rate, and contacts were more optimistic about future sales growth than in previous reports. Retail sales grew moderately, at a similar pace of growth as in the previous survey. Several retailers noted stronger sales of home improvement and building materials, though sales for some higher-priced items were characterized as weak. Expectations for future sales remained strong, and inventory levels were expected to rise somewhat. Auto sales were up modestly from the previous survey. Dealer contacts anticipated some increases in sales in the months ahead and noted solid sales for mid-sized vehicles and small SUVs. Auto inventories fell further, with one contact noting a considerable rise in the cost of inventory. Restaurant sales weakened in late August and September but remained well above year-ago levels, and contacts expected sales to improve in coming months. Many restaurants reported a reduction in employment, and one restaurant owner said they would be adding a health care surcharge of 3 percent to each check. District tourism activity fell from the previous month, but was up strongly from a year ago. Expectations for future tourism edged down somewhat but remained solid.
Manufacturing and Other Business Activity
District manufacturing and other business activity rose modestly in late August and September. Factory production increased, primarily at durable goods producers, though several nondurable-goods producers also reported modest gains. However, activity at some food processing plants continued to decline in the face of higher beef prices. Contacts reported solid gains in factory shipments and employment, with new orders up slightly. Expectations for future factory activity held steady at overall favorable levels. Manufacturers' capital spending plans increased slightly and remained well above year-ago levels. Growth in wholesale trade sales increased, with contacts expecting continued solid growth in the next few months. Transportation, professional, and high-tech firms reported smaller gains than the previous survey, although sales remained considerably higher than year-ago levels and many contacts expected solid improvement heading forward. One trucking firm cited supply chain disruptions and new regulations as having slowed freight traffic for both shippers and distributors.
Real Estate and Construction
On balance, District real estate activity increased slightly in late August and September with residential real estate activity flat and commercial real estate activity increasing moderately. Residential home sales were unchanged compared to the previous survey period and were similar to year-ago levels. Sales of low- and medium-priced homes continued to run ahead of sales for higher-priced homes. Home prices increased modestly, and inventories continued to rise slightly. Most residential real estate contacts expected home sales to decrease in the coming months primarily reflecting typical seasonal declines. Housing starts and construction supply sales edged down since the previous survey period. Residential construction activity was expected to pick up slightly as builders anticipated a slight increase in traffic of potential buyers. Commercial real estate activity increased moderately relative to the previous survey period as contacts continued to report a decline in vacancy rates, an increase in absorption, higher sales, and increased construction activity. The commercial real estate market was expected to strengthen at a moderate pace over the coming months.
Banking
Bankers reported steady overall loan demand, a modest improvement in loan quality, and mostly steady deposit levels in late August and September. Loan demand was slightly improved for agricultural loans, consumer installment loans and commercial and industrial loans. Demand for residential real estate loans was slightly weaker compared to the last survey. Even with the recent modest improvement in loan quality, most bankers indicated loan quality was unchanged compared to a year ago, and many expected it to remain the same over the next six months. Credit standards remained largely unchanged for all major loan categories, and deposit levels were stable for most banks.
Energy
Energy activity continued to expand in late August and September. District contacts reported steady growth in drilling activity, primarily for oil, and expectations for future drilling were solid, though somewhat lower than the previous survey. Oil prices declined in late August and September, as global demand failed to keep up with supply. Most respondents expected oil prices to decline marginally in the coming months, yet most producers anticipated that drilling would remain profitable across the areas where they are active. Natural gas prices continued to decline but remained slightly above year-ago levels; most contacts expected these prices to start to rise modestly as the winter heating season approaches. Energy firms' overall capital expenditure plans remained solid.
Agriculture
Despite expectations of above-average yields, further declines in crop prices weighed on farm income prospects in the District. However, crop insurance and some pre-selling of this year's crop at higher prices earlier in the year may help mitigate the effect on overall farm incomes of recent spot price declines. The corn and soybean crops were mostly rated in good to excellent condition as harvest began. Cattle prices rose since the last survey period while hog prices fell with increased production resulting from higher dressed weights. The demand for farm operating loans has risen substantially from last year as more crop producers borrowed to pay for operating costs. Bankers also reported a rise in requests for agricultural loan renewals and extensions and noted that loan repayment rates have edged down from the high levels seen the past few years. Despite the sharp drop in crop prices, farmland values were typically holding at high levels.
Wages and Prices
Relative to the previous report, prices rose at a slightly slower pace in most industries, and while most firms reported only modest wage pressures, in some cases wage pressures were more pronounced. Retail price growth was minimal, likely because retailers' input costs rose more slowly than in previous surveys. Restaurant menu prices also rose less than in previous surveys despite persistent growth in input costs. Manufacturing selling prices rose slightly, while raw materials prices continued to increase at modest rates. Transportation input prices fell and fewer transportation firms raised their selling prices. Construction materials prices were up in late August and September, and many builders expected further increases. Contacts in most industries expected prices to rise moderately going forward. Increased wage pressures were noted in a few industries, particularly manufacturing, restaurants, transportation, and energy. Some contacts continued to report a short supply of workers, particularly for drivers, construction, and skilled manufacturing positions.