Beige Book Report: Kansas City
December 2, 2015
Economic activity in the Tenth District held steady on balance since the prior Beige Book, with continued mixed conditions across sectors. Consumer spending continued to decline slightly, but remained above year-ago levels. Energy activity continued to decline moderately, and farm income weakened further. District manufacturing firms reported flat activity compared to the previous survey. On the positive side, District real estate activity continued to increase, and transportation and wholesale trade firms noted a slight rise in sales. Professional and high-tech firms reported moderate increases in activity, and bankers reported steady loan demand, deposit levels, and overall loan quality. Prices were mixed across industries, but eased in the construction and manufacturing sectors. Although wage pressures were mostly contained, contacts in a few industries continued to report labor shortages for skilled and entry-level positions.
Consumer Spending
Consumer spending activity continued to decline slightly since the previous survey period, but activity remained higher than a year ago, with improved expectations heading forward in most sectors. Retail sales picked up moderately in October and November and remained higher than year-ago levels. Several retailers noted a drop in sales for metal and luxury products, although sales of lower-priced items and lumber were favorable. Contacts expected sales to increase slightly in coming months, with inventory levels expected to decrease. Auto sales dropped markedly but were higher than a year ago, and dealer contacts expected a slight pickup in sales growth for the months ahead. Auto inventories declined from the previous month and were expected to remain stable. Restaurant sales weakened further but were higher than a year ago, with contacts expecting moderate improvements in the months ahead. District tourism activity continued to decline but was generally flat from a year ago. Tourism contacts expected some strengthening in activity as the winter ski season begins.
Manufacturing and Other Business Activity
Manufacturing activity was generally flat, while other business activity increased from the previous survey. Durable goods production improved considerably for aircraft, computer, and electronic equipment products, while the production of other durable goods continued to decline. Nondurable goods production remained positive. Activity continued to be weakest in oil and gas states. Production, shipments, and new orders increased modestly but remained lower than a year ago. Manufacturers' capital spending plans improved and expectations for future activity rebounded from the previous survey.
Outside of manufacturing, professional and high-tech firms reported moderate increases in activity, with sales well above year-ago levels and solid expectations for future months. Transportation and wholesale trade contacts noted a slight increase in November sales after a considerable drop in October, although many firms expected activity to rise steadily in the months ahead. Most service businesses reported fairly solid capital spending plans.
Real Estate and Construction
District real estate activity continued to increase at a modest pace since the previous survey period and was moderately above year-ago levels. Residential real estate sales, led by strong gains in Colorado, continued to rise at a moderate pace compared to the previous survey period. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential home prices were flat in October and November, but remained well above year-ago levels. Inventories increased slightly, and home sales were expected to slow in the winter months due largely to seasonal factors. Residential construction contacts reported a moderate increase in housing starts, while contacts at construction supply firms noted a slight increase in overall activity since the last survey. Contacts in both residential construction and construction supply firms noted that activity was moderately above year-ago levels. Commercial real estate activity continued to expand at a modest pace in October and November as vacancy rates decreased and absorption rates, completions, construction underway, sales and prices increased. The commercial real estate sector was expected to continue to strengthen at a modest pace over the coming months.
Banking
Bankers reported steady overall loan demand, deposit levels and loan quality, compared to the results of the last survey. Respondents indicated a steady demand for commercial and industrial, commercial real estate, residential real estate, agricultural and consumer installment loans. Most bankers indicated 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. Finally, most respondents reported stable deposit levels.
Energy
Energy activity declined at a similar pace as in previous months, while expectations remained negative. The number of oil and gas drilling rigs continued to decline, particularly in Oklahoma and New Mexico. Local producers remained focused on maintaining low costs and operating efficiently in their areas of highest returns. Oil prices were mostly unchanged since the last survey period, and most respondents expected the low price environment to continue through much of next year. Natural gas prices eased further as a result of robust production and strong builds to inventories. Seasonal demand for natural gas was expected to pick up as winter weather arrives across the region, but prices were expected to be lower than last winter.
Agriculture
Farming conditions weakened further since the last survey period as agricultural commodity prices remained relatively low. Despite expectations of strong crop yields in the District and some government farm program payments, District contacts reported further declines in farm income and expected additional weakening in the months ahead for both the crop and livestock sectors. Crop prices generally remained flat since the previous reporting period and livestock prices were substantially below year-ago levels. Agricultural credit conditions also deteriorated further as repayment rates edged lower, credit availability declined slightly, and expectations of future financial stress increased somewhat. Amid the weaker farm economy, farmland values of all types were expected to decline in the coming months.
Wages and Prices
Price changes across industries were mixed, and wages were steady overall since the previous survey period. Both retail input and selling prices rose at a modest pace, with faster growth expected in the coming months. Restaurant menu prices were flat after falling in the previous survey, though input prices still increased. The decline in manufacturing raw materials and finished good prices slowed mildly, and manufacturers expected both of these prices to rise in the near future. Transportation input prices increased slightly while selling prices continued to decline. Selling prices in construction also declined. Wages in the retail sector were steady, while restaurants experienced faster wage growth and the transportation sector saw a slight decline in wages. Transportation contacts cited continued shortages in truck drivers, technicians, mechanics, and entry-level workers.