Beige Book Report: Kansas City
September 2, 2015
Economic activity in the Tenth District continued to rise modestly in July and early August, with mixed conditions across sectors. Consumer spending continued to grow at a moderate pace as retail, restaurant, and auto sales increased and District tourism activity was flat. Manufacturing activity continued to decline primarily due to weakness in food, beverage, plastics, and metal production, but expectations remained modestly positive. Professional, high-tech, and transportation firms reported moderately higher sales compared to a year ago and expected further gains over the coming months. Real estate activity across the Tenth District continued to increase at a modest pace, but residential real estate contacts expected the pace of expansion to slow over the coming months. Banking contacts reported stable loan demand, loan quality and credit standards as well as a slight increase in deposit levels. Energy activity remained weak as oil prices fell to six-year lows. District farm income remained subdued, agricultural credit conditions weakened, and crop prices dropped sharply as a strong fall harvest was expected. Prices were mixed across sectors in the District, and wage growth slowed despite some reported labor shortages.
Consumer Spending
Consumer spending activity rose at a moderate pace, with further growth expected in the months ahead. Retail sales increased moderately from the previous survey period and remained higher than year-ago levels. Several retailers noted an increase in sales for lumber, upholstery, and summer-related products, while sales of higher-end products were weak. Expectations for future retail sales remained strong, and inventory levels were expected to rise moderately. Auto sales increased moderately and were slightly above year-ago levels, with sales expected to climb higher in the months ahead. Dealer contacts noted increased sales of larger vehicles such as trucks and SUVs, and slower sales for small and hybrid cars. Auto inventories fell modestly, although most contacts expected levels to rebound in the next six months. Restaurant sales remained solid and were moderately higher than year-ago levels, with a slight increase in activity expected over the coming months. District tourism activity was roughly flat since the previous survey, but contacts expected activity to fall moderately in the months ahead.
Manufacturing and Other Business Activity
Manufacturing activity declined at a moderate pace, while other business activity was mixed. Manufacturing shipments fell to their lowest levels of the year, as production decreased in nearly all District states. The downturn was mostly attributable to a sharp decrease in food, beverage, and plastics production and continued weakness in metal production. Expectations for future activity remained modestly positive, but manufacturers' spending plans decreased markedly. Wholesale trade firms also reported a decrease in activity over the previous survey period, although sales were higher than a year ago and expectations were positive heading forward. Professional, high-tech, and transportation contacts reported increasing monthly sales, with activity moderately above last year's levels. Firms expected activity to rise considerably in the months ahead. Most transportation and wholesale trade firms reported modest capital spending plans, while professional and high-tech contacts noted stronger plans for capital expenditures.
Real Estate and Construction
District real estate activity continued to increase modestly in July and early August as both residential and commercial real estate markets expanded. Residential real estate sales and inventories increased modestly since the previous survey period, and sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Increases in home prices remained robust, and additional gains were expected. Expectations for residential real estate activity remained positive, but many respondents expected slower growth over the coming months due to normal seasonal factors. Residential construction contacts reported a moderate rise in housing starts, while contacts at construction supply firms noted a slight decline in activity. Commercial activity continued to expand at a modest pace in July and early August and was moderately above year-ago levels. The commercial real estate market was expected to continue to strengthen at a modest pace over the coming months.
Banking
Bankers reported steady overall loan demand and loan quality, as well as a slight increase in deposit levels since the last survey period. Respondents indicated a steady demand for commercial and industrial, commercial real estate, residential real estate, agricultural and consumer installment loans, and loan quality was unchanged compared to a year ago. In addition, a strong majority of respondents expected loan quality to remain essentially the same over the next six months. Credit standards remained largely unchanged in all major loan categories. Deposit levels increased slightly, with respondents primarily split between reporting increased or steady deposit levels.
Energy
Tenth District energy activity stabilized somewhat, but remained weak. The outlook for the remainder of the year turned cautious as producers dealt with a second drop in oil prices and expectations of a prolonged low-price environment. Since the last survey period, the number of active oil drilling rigs rose slightly but remained low. Drilling permits increased, but some respondents commented that well completions were on hold. Crude oil inventories in Cushing, Oklahoma were mostly flat, despite record high refinery utilization rates and strong seasonal demand for petroleum products. Pressured by global factors, oil prices fell sharply in July and early August to six-year lows. Several respondents also expressed concerns about the lifting of sanctions against Iran and its potential negative effects on prices and production. Seasonal demand for air conditioning has increased the use of natural gas in the power sector and lifted prices slightly.
Agriculture
District farm income remained subdued, and agricultural credit conditions weakened since the last survey period. After rebounding briefly in June, crop prices declined sharply in July and early August due to improved growing conditions and expectations of a strong fall harvest. Although loan repayment rates declined slightly compared to a year ago, bankers reported only minor loan repayment problems, and very few applications for operating loans were denied. Signs of financial strain were strongest in regions most dependent on crop production, such as Nebraska, Kansas, and western Missouri. District contacts were more optimistic in Oklahoma and Colorado, where farm income was supported by positive profit margins in the cow-calf sector. Low crop prices, however, and expectations of reduced farm income led to further modest declines in District cropland values.
Wages and Prices
Prices across industries in the Tenth District were mixed while wage growth slowed in many sectors even though contacts cited labor shortages for workers across many skill levels. Retail input and selling prices both increased at a modest pace, and retailers expected selling prices to rise moderately in the near future. Restaurant menu prices rose modestly. Manufacturers' raw material and finished good prices declined moderately since the previous survey period, and contacts expected these prices to continue to decline in coming months. Transportation input and output prices declined modestly, while construction materials prices rose at a slightly slower pace than the previous survey period. Retail and restaurant sector wages rose slightly, while wages in transportation increased moderately. Contacts cited labor shortages for low-skilled and entry-level positions, skilled technicians, software engineers, and truck drivers.