Beige Book Report: Kansas City
March 4, 2015
The Tenth District economy continued to grow slightly in January and early February, and most contacts remained optimistic about future activity. Consumer spending was flat, with a rise in auto and restaurant sales offsetting a decrease in retail and tourism activity. District manufacturing and other business activity rose as increases in transportation, professional, high-tech services, and wholesale trade activity outweighed small declines in overall manufacturing production. Real estate activity increased slightly, and both commercial and residential inventories declined further. Banking contacts reported mixed loan demand across sectors, stable loan quality, and steady deposit levels. District farm income and crop prices decreased, cropland values remained steady, and ranchland values increased compared to the previous survey period. Energy activity continued to slow and was expected to fall further. Prices continued to grow modestly, and wages grew slightly since the previous survey period. A few contacts noted a short supply of workers for truck drivers, management, skilled technicians, and IT developers.
Consumer Spending
Consumer spending activity was flat in January and early February, but remained higher than a year ago with solid expectations for the coming months. Retail sales declined from the previous survey but were around year-ago levels. Several retailers noted a drop in sales of luxury products, although sales of winter and lower-priced items were steady. Expectations for future sales were increasingly positive, and inventory levels were expected to remain fairly stable. Auto sales rebounded in January and early February, particularly for trucks, and dealer contacts expected moderate growth in the months ahead. Auto inventories rose from the previous survey period, with additional increases expected. Restaurant sales improved modestly and were considerably above year-ago levels, with positive growth expected in the coming months. District tourism activity remained sluggish, although activity was higher than a year ago. Contacts in Colorado, however, reported strong tourism activity compared to the previous survey period and expected further gains over the coming months.
Manufacturing and Other Business Activity
Overall District manufacturing activity expanded at a slow pace in January and early February, while other business activity increased. Despite a slight decrease in manufacturing production since the previous survey, inventories and supplier delivery times rose and producers' expectations for future activity remained solid. Slower growth was mostly attributable to declines in some types of durable goods production, particularly electronics, machinery, and metal products, some of which was likely due to lower energy activity. In contrast, nondurable goods producers reported a slight increase in production, especially for food and plastics products. Looking across District states, the weakest factory activity was in energy-dependent Oklahoma. Manufacturers' capital spending plans were not as strong as in the previous survey, but hiring plans remained solid. Transportation firms reported stronger activity, and sales were above year-ago levels with solid expectations for future months. Professional, high-tech services, and wholesale trade contacts also noted a slight increase in sales from the previous survey, but the pace of growth was expected to slow slightly in coming months. Most firms reported solid growth in capital spending plans.
Real Estate and Construction
District real estate activity increased slightly as moderate growth in commercial real estate activity was partially offset by modest declines in residential real estate sales. Residential sales decreased modestly since the previous survey, partially due to typical seasonal sales patterns and low inventories. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Home prices made strong gains, and inventories continued to decline. Expectations for sales and prices remained positive, and inventories were expected to fall further. Residential construction activity was flat in January and early February. Builders and construction supply contacts expected moderate growth in residential real estate activity in the coming months supported by higher home prices, sales, and starts. Commercial real estate activity continued to rise moderately as vacancy rates decreased and absorption increased at a faster pace. Growth in commercial real estate completions, sales, prices, and construction underway slowed slightly, but remained positive. The commercial real estate market was expected to continue to strengthen at a moderate pace in the months ahead.
Banking
Bankers reported mixed loan demand across sectors in January and early February, while loan quality and deposit levels were stable. Respondents indicated increased demand for residential real estate loans, and demand for commercial and industrial and consumer installment loans was mostly steady. However, respondents reported a slight decrease in demand for agricultural loans. Most bankers indicated loan quality was unchanged compared to a year ago, while a slight majority of bankers expected the outlook for loan quality to improve over the next six months. Credit standards remained largely unchanged in all major loan categories. In addition, deposit levels were stable for a majority of bankers.
Agriculture
District farm income weakened further since the last survey period, but cropland values generally held steady. Corn and soybean prices edged down in January and early February, and farm income remained well below year-ago levels even as profitability in the livestock sector remained relatively strong. After several years of herd culling, District cattle operators retained more replacement heifers compared with last year, indicating the potential for rebuilding herds in 2015. Following several years of strong gains, District non-irrigated and irrigated cropland values leveled off while ranchland values continued to rise due to strong demand for good-quality pasture. Lower farm income trimmed farm loan repayment rates and increased demand for new loans as well as loan renewals and extensions. Looking forward, District contacts expected modest declines in cropland values and further deterioration in farm loan repayment rates amid tighter profit margins for crop producers.
Energy
Energy activity in the District continued to slow and oil and gas producers attempted to reduce costs in January and early February as a result of low oil prices. The number of active oil and gas drilling rigs fell sharply through early February. Many producers reported large capital spending cuts and several announced layoffs. Future drilling activity was expected to fall, and to increasingly focus on core areas. Additionally, respondents commented that cash flows would determine future capital spending levels. Contacts expected oilfield activity to become more efficient with cost reductions, thus limiting declines in oil production. Natural gas spot prices remained stable but low despite typical seasonally cold temperatures across the nation this winter.
Wages and Prices
Compared to the previous survey period, prices continued to increase modestly in most industries. Wages also continued to rise slightly, with some respondents noting sustained shortages of certain workers. Retail prices rose modestly as input prices continued to grow at a moderate pace. Restaurant menu prices maintained their modest growth rate. Manufacturers' raw materials prices increased at a slower rate than in the previous survey. Finished goods prices held steady, but were moderately higher than a year ago. Transportation contacts reported moderately lower input prices, but selling prices edged higher. Construction materials prices rose over the survey period and were expected to continue to increase. Wages continued to grow moderately in the retail, restaurant, and transportation sectors, but were expected to grow at a slightly faster rate moving forward. Some contacts cited labor shortages, especially for truck drivers, management, skilled technicians, and IT developers.