Beige Book Report: Kansas City
June 3, 2015
Economic activity in the Tenth District grew slightly overall in April and May but with mixed conditions across sectors. Consumer spending rose moderately, and transportation and wholesale trade firms reported stronger sales activity. District real estate activity continued to increase at a modest pace, with positive expectations for coming months. Professional and high-tech contacts noted a moderate increase in activity from previous months, and bankers reported a slight rise in loan demand and declining deposits. District manufacturing activity declined sharply, and substantial weakness in the energy sector persisted. Farm income levels declined from the previous survey period, although crop conditions improved. Prices rose slightly in most industries and wage growth was steady, with many firms indicating plans to increase wages over the next year.
Consumer Spending
Consumer spending activity rose moderately and remained higher than a year ago, with solid expectations heading forward. Retail sales picked up in April and May and were considerably higher than year-ago levels. Several retailers noted an increase in sales for building materials and home improvement products, while sales of luxury and custom-made items remained weak. Expectations for future sales were strong, and inventory levels were expected to pick up slightly. Auto sales increased moderately and were up compared to last year, with further growth expected in the months ahead. Dealer contacts noted a particular increase in sales of used vehicles, while sales of large trucks and SUVs slowed slightly. Auto inventories rose from the previous survey, and most contacts expected levels to continue to increase. Restaurant sales remained moderately weak and below year-ago levels, although contacts anticipated positive growth in coming months. District tourism activity was strong in April but moderately weaker in May as the winter season wound down and spring storms increased. Tourism contacts expected sluggish growth for the months ahead.
Manufacturing and Other Business Activity
Manufacturing activity declined sharply in April and May, while other business activity was considerably more positive. Manufacturing production contracted at the sharpest pace since mid-2009, and producers' expectations for future activity also fell moderately. The downturn was mostly attributable to declines in plastics, food, and aircraft production and further weakness in metals and machinery products. Production fell most sharply in energy-producing states like Oklahoma and New Mexico, but it was also down in most other District states. Manufacturers' capital spending plans fell from the previous survey, and export orders remained weak. Transportation and wholesale trade firms reported stronger activity than in the previous survey, with sales considerably above year-ago levels and solid expectations for future months. Professional and high-tech services contacts noted a moderate increase in sales from the last survey, and firms expected activity to rise steadily in the months ahead. Most transportation, wholesale trade, professional, and high-tech businesses reported solid capital spending plans.
Real Estate and Construction
District real estate activity continued to increase at a modest pace in April and May, and expectations were positive for the coming months. Residential real estate sales increased moderately since the previous survey period, with low- and medium-priced homes outpacing sales of higher-priced homes. Home prices continued to make strong gains, and inventories fell at a modest pace. Expectations for sales and prices remained robust, and inventories were expected to decline further. Residential construction activity was unchanged as new housing starts and construction supply sales were flat. Builders and construction supply contacts expected a modest rise in residential construction activity in the coming months. Commercial real estate activity continued to increase modestly in April and May as vacancy rates decreased and absorption rates, completions, construction underway, sales and prices increased. The commercial real estate market was expected to strengthen at a modest pace over the coming months.
Banking
Bankers reported a slight increase in overall loan demand, stable loan quality, and declining deposit levels since the last survey. Respondents indicated a slight increase in demand for residential real estate loans, while demand for commercial real estate, commercial and industrial, consumer installment loans and agricultural loans remained relatively steady. Most bankers indicated loan quality was unchanged compared to a year ago, and the majority of contacts expected it to remain the same over the next six months. Credit standards remained largely unchanged in all major loan categories. A larger number of respondents reported declining deposit levels compared to the last survey, principally in CDs.
Energy
The slowdown in the District's energy sector persisted and expectations remained cautious. The number of active oil drilling rigs declined moderately since the last survey period, and layoffs continued at regional oil and gas firms. Drilling activity was concentrated in more productive areas and in locations where drilling rights needed to be retained. Crude oil inventories at the key Cushing, Oklahoma storage hub finally began to edge down in May as oil production slowed slightly in some key producing areas. Oil prices rebounded somewhat in April and May, but most contacts expected prices to remain volatile for the remainder of the year. Several respondents said that if a further rebound in oil prices occurs and holds, drilling could ramp back up later this year, as technology and other efficiency gains within the industry have led to somewhat lower breakeven prices. Natural gas prices increased somewhat in mid-May as demand for electrical generation grew.
Agriculture
Farm income declined since the last survey period due to persistently low crop prices. Corn, soybean and wheat prices remained significantly below year-ago levels, dampening farm income expectations despite improved growing conditions due to timely rains. Reduced working capital and high input costs boosted demand for new farm loans as well as renewals and extensions on already-existing loans. District bankers also reported a slight rise in carry-over debt relative to last year. Although sufficient funds were available to meet increased loan demand, loan repayment rates declined and were expected to fall further in the next several months. Deteriorating financial conditions in the crop sector put downward pressure on non-irrigated and irrigated cropland values, but ranchland values remained strong amid positive profit margins for cow-calf operations.
Wages and Prices
Prices in the majority of industries continued to grow slightly and wage growth was steady, with more firms planning to increase wages within the next year. Retail selling prices rose slightly, and restaurant menu prices continued to increase modestly. Manufacturers' raw material and finished goods prices declined at a slower pace than in the previous survey, and contacts expected prices to rise modestly in the coming months. Transportation input and output prices increased slightly, while construction materials prices declined modestly. Wages in the transportation and restaurant sectors rose modestly, while wages in retail were steady. Respondents continued to highlight shortages for truck drivers and auto technicians, as well as difficulty finding entry-level and sales staff. Contacts in most sectors said they expected labor costs to increase within the next twelve months.