Beige Book Report: Kansas City
July 15, 2015
The Tenth District economy increased modestly in June, and contacts in most industries anticipated stronger growth in the months ahead. Consumer spending activity expanded at a moderate pace with retail, restaurant, tourism and auto contacts reporting higher sales since the last survey. Contacts in the manufacturing and energy sectors noted a decline in overall activity, however their expectations for the coming months improved since the previous survey period. Transportation firms also reported a slight decline in sales, but activity in the professional, high-tech, and wholesale trade sectors continued to increase. Real estate activity continued to rise at a modest pace in June, and commercial and residential construction activity was expected to accelerate at a moderate pace in the coming months. Most bankers reported stable overall loan demand, loan quality and deposit levels. Heavy rain in late May led to a decline in expectations for the winter agricultural harvest, but soil moisture improved for developing crop and pastures. Prices continued to rise slightly in the majority of industries, and wages grew modestly.
Consumer Spending
Consumer spending activity rose moderately and remained higher than a year ago, with mostly solid expectations heading forward. Retail sales increased moderately in June and were above year-ago levels. Several retailers noted an increase in sales for building materials and summer-related products, while sales of home furnishings were weak. Expectations for future sales remained strong, and inventory levels were expected to rise slightly. Auto sales continued to increase modestly and were slightly higher than last year, with further gains expected in the months ahead. Dealer contacts noted particularly strong sales of larger vehicles such as trucks and SUVs. Auto inventories increased, and most contacts expected inventory levels to continue to rise. Restaurant sales improved considerably compared to the previous survey and year-ago levels, and additional gains were anticipated in the coming months. District tourism activity strengthened moderately in June but was lower than last year.
Manufacturing and Other Business Activity
Manufacturing activity continued to decline in June but at a slightly slower pace than during the previous survey period, while other business activity was mixed. Manufacturing production contracted further, although producers' expectations for future activity were positive and slightly higher than the previous survey. Durable goods manufacturing declined, but at a more gradual pace than in the previous survey period. Nondurable goods production also fell further across most subsectors, and at a somewhat faster pace of decline than in the previous survey. Production declined in all District states except for Colorado, but continued to be weakest in energy-concentrated Oklahoma. Manufacturers' capital spending plans increased to their highest level in five months. Transportation firms reported a decline in activity since the previous survey, although sales were modestly higher than a year ago and expectations were positive heading forward. Professional, high-tech, and wholesale trade contacts reported increased sales but at a slower pace than the previous survey. Firms expected activity to rise moderately in the months ahead. Most transportation, wholesale trade, professional, and high-tech businesses reported solid capital spending plans.
Real Estate and Construction
Real estate activity continued to increase at a modest pace in June, and contacts expected activity to expand at a faster pace over the coming months. Residential real estate sales rose modestly since the previous survey period and were above year-ago levels. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Home prices continued to make strong gains, and inventories fell further. Expectations for sales and prices were strong, and inventories were expected to decline modestly. Residential construction and related business activity expanded as new housing starts and construction supply activity increased at a modest pace, and contacts anticipated a moderate rise over the coming months. Commercial real estate activity continued to expand at a modest pace in June as vacancy rates decreased and absorption rates, completions, construction underway, sales and prices increased. The commercial real estate market was expected to strengthen moderately over the months ahead.
Banking
Bankers predominately reported stable loan demand, loan quality, and deposit levels since the last survey period. Respondents indicated a steady demand for commercial and industrial, commercial real estate, residential real estate, and consumer installment loans, with fewer bankers indicating an increase in these categories compared to the last survey. Demand for agricultural loans was primarily split between increased and steady demand. Most bankers indicated loan quality was unchanged compared to a year ago. In addition, most respondents expected loan quality to remain the same over the next six months. Credit standards remained largely unchanged in all major loan categories, and most respondents reported steady deposit levels.
Energy
Energy activity continued to decline in June, but expectations for the coming months improved considerably despite continuing concern about the volatility in oil prices. Compared to the last survey period, the number of active oil drilling rigs fell modestly through June, primarily in Oklahoma, and drilling activity declined, but at a slower pace. Steady withdrawals of crude oil inventories continued in Cushing, Oklahoma, as seasonal demand for petroleum products picked up and refinery utilization rates rose. Oil prices reached the highest levels of the year in mid-June, but struggled to maintain those levels through the end of the month. Most respondents expected oil prices to increase somewhat in the coming months primarily as a result of slowing U.S. production. Slowing natural gas production growth and higher energy demands due to warmer weather reduced oversupply and supported natural gas prices.
Agriculture
District agricultural production expectations declined slightly since the last survey. Heavy storms in late May reduced expectations for the winter wheat harvest in Kansas and Oklahoma and also delayed soybean planting progress throughout the Tenth District. However, the substantial rainfall generally improved soil moisture for developing crops and pastures, and over half of the corn crop in Nebraska, Missouri, and Kansas was in good or excellent condition. With reduced production expectations, the price of hard red winter wheat rose modestly in June, and corn and soybean prices also increased slightly. In the livestock sector, beef cattle production through May was slightly lower than last year, holding cattle prices near historically high levels. Conversely, hog production over the same period grew modestly, placing downward pressure on hog and retail pork prices.
Wages and Prices
Prices continued to rise slightly in the majority of industries, and wages grew modestly. Retail input and selling prices grew at a faster pace in June, and input prices were expected to rise further in the months ahead. Restaurant menu prices also rose at a faster pace than the previous survey. Manufacturing finished goods prices experienced a slight decline despite a modest increase in raw materials prices. Transportation input prices increased slightly, but output prices fell modestly. Construction prices grew modestly, and contacts anticipated additional increases in the near future. Wages in the retail and restaurant sectors rose at a faster rate than the previous month. Transportation wages rose slightly and were expected to continue to rise in the coming months. Respondents noted difficulty finding truck drivers, IT developers, skilled technicians and some entry-level positions.