Beige Book Report: Kansas City
January 14, 2015
The Tenth District economy continued to grow slightly in December, and most contacts expected moderate growth over the coming months. Consumer spending slowed slightly as retail, auto, and tourism sales experienced a decline. However, contacts anticipated an increase in consumer spending in the coming months. District manufacturing and other business activity increased slightly with a moderate expansion of factory production for durable goods accompanied by sluggish factory production for nondurable goods. Real estate activity continued to edge up, with a moderate rise in commercial real estate activity offsetting seasonally sluggish residential real estate activity. Contacts in the banking industry reported a slight increase in overall loan demand, stable loan quality, and steady deposit levels. Agricultural growing conditions were favorable, with improved soil moisture in many parts of the District and a winter wheat crop that was rated in mostly good condition. The District's energy sector slowed in December and was expected to slow further in response to lower energy prices. Contacts in most industries continued to note a modest rise in overall prices with a slight acceleration in wages primarily due to labor shortages.
Consumer Spending
Consumer spending slowed slightly in December, but activity remained higher than a year ago with solid expectations for the coming months. Retail sales declined from the previous survey and were lower than a year ago. Several retailers noted a drop in sales of high-end products, although sales of home improvement items were steady. Expectations for future sales moderated but remained positive, and inventory levels were expected to drop considerably. Auto sales decreased, but at a slower rate than in the previous survey. However, auto sales remained higher than year-ago levels, and dealer contacts expected moderate growth in the months ahead. Auto inventories continued to rise, with further increases expected. Restaurant sales improved in December and were moderately above year-ago levels, with further growth anticipated in coming months. District tourism activity declined modestly, although activity was higher than a year ago and contacts expected strong growth for the remainder of the winter ski season.
Manufacturing and Other Business Activity
District manufacturing and other business activity increased slightly in December. Factory production expanded at a moderate pace, particularly for electronics, aircraft, and machinery products, while nondurable goods production remained sluggish. Contacts reported marked gains in factory shipments and new orders, and expectations for future factory activity remained at solid levels. Manufacturers' capital spending plans increased modestly from the previous survey, and export orders were expected to rise moderately. Transportation firms reported weaker activity, although sales were similar to year-ago levels with moderately higher expectations for future months. Professional, high-tech, and wholesale trade contacts noted a slight increase in sales from the previous survey, but the pace of growth was expected to slow somewhat in coming months. Most businesses reported solid growth in capital spending plans.
Real Estate and Construction
District real estate activity continued to edge up as stronger commercial real estate activity offset seasonally sluggish residential real estate activity. Expectations for overall real estate activity were positive. Residential home sales decreased moderately compared to the previous survey period, partially due to typical seasonal sales patterns. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes; however, a few contacts reported an increasing volume of mid- to higher-priced homes sales. Home prices continued to increase modestly since the previous survey period as inventories fell further. Expectations for residential home sales and prices were positive as inventories were anticipated to continue to decline modestly. Residential construction activity decreased modestly, and traffic of potential buyers was flat. Housing starts fell modestly, and sales of construction supply materials were moderately below previous survey levels. Commercial real estate activity continued to increase at a moderate pace, and contacts reported lower vacancy rates and higher absorption rates, completions, sales, prices, and rents. The commercial real estate market was expected to continue to expand moderately over the coming months.
Banking
Bankers reported a slight increase in overall loan demand, stable loan quality, and steady deposit levels through December. Half of respondents reported increasing demand for commercial and industrial loans, while the other half noted steady demand. Most respondents reported steady demand for agricultural, consumer installment, and commercial real estate loans. Demand for residential real estate loans remained mixed. Most bankers indicated loan quality was unchanged compared to a year ago, and a majority of bankers expected the outlook for loan quality to remain the same over the next six months. Credit standards remained largely unchanged in all major loan categories. In addition, deposit levels remained mostly constant, with more bankers reporting increasing deposit levels than during the last survey.
Agriculture
Agricultural growing conditions were generally favorable in December, and crop prices rose modestly. Although some western areas of Kansas and Oklahoma remained dry, scattered rains improved soil moisture in many parts of the District and the winter wheat crop was rated in mostly good condition. Wheat prices increased modestly amid global supply concerns due to limits on Russian grain exports and lower production estimates in Australia. Corn and soybean prices also rose modestly since the last survey period due, in part, to a slight downward revision in 2014 U.S. production estimates. In the livestock sector, weaker export demand for pork placed downward pressure on hog prices. High feeder cattle prices prompted some producers to feed cattle to heavier weights to boost profit margins.
Energy
The District's energy industry slowed in December. Most respondents reported lower drilling activity, and demand for oilfield services fell. Oil rigs decreased marginally while natural gas rigs increased. Future drilling activity, employment, and capital expenditures were projected to be significantly lower in response to lower oil prices. The price of oil dropped to half of its June peak and was projected to fall further through early 2015. Firms' opinions were mixed about oil prices one year out, but on average they expected a rebound of 15 to 20 dollars per barrel from year-end 2014 levels. Moderate temperatures and higher production pulled down the natural gas spot price over the reporting period, with future decreases expected. A few firms reported increased difficulties accessing credit due to lower oil prices.
Wages and Prices
Prices in most industries continued to grow modestly in December, and wage growth accelerated slightly, with many contacts citing labor shortages. Retail prices rose moderately, and restaurant menu prices continued to increase due to higher input costs. Manufacturers' raw materials prices increased, although at a much slower pace, while finished goods prices were unchanged from the previous survey period. Transportation input prices were flat in December after declining during the previous survey period, while selling prices in the sector remained unchanged. Construction materials prices remained steady, but most contacts anticipated a slight rise in the months ahead. Wages in the retail sector continued to increase during the holiday season, and transportation contacts noted higher wages due to difficulties acquiring CDL drivers. Nearly all contacts reported increased labor costs as a result of new healthcare regulations. Respondents noted a particular shortage in skilled machinists, engineers, IT developers, and a sustained shortage of truck drivers.