Beige Book Report: Kansas City
January 13, 2016
Economic activity in the Tenth District was flat in December, but expectations for future activity were positive outside of the energy and agriculture sectors. Consumer spending was mixed across sectors, with increased retail and tourism activity and decreased auto and restaurant sales. District manufacturing activity declined moderately for both durable and nondurable goods, and the weakest activity continued to be in energy-concentrated states. Professional and high-tech firms continued to report moderate increases in activity, but wholesale trade and transportation contacts reported a sharp decline. District real estate activity increased slightly since the previous survey period as a seasonally sluggish residential real estate sector was offset by positive growth in the commercial real estate sector. Bankers continued to report steady loan demand, deposit levels, and loan quality. Energy activity in the District fell at a slightly faster pace than the previous survey period, and warmer-than-expected winter months combined with abundant inventory levels put further downward pressure on oil and gas prices. Farm income expectations remained subdued as a strong fall harvest kept corn prices near year-ago-levels and soybean prices were significantly less than a year ago. Prices were mixed across sectors, while wage growth generally held steady across the District.
Consumer Spending
Consumer spending activity was mixed across sectors since the previous survey period, and expectations were positive for the months ahead in most consumer sectors. Retail sales picked up modestly in December and remained higher than year-ago levels. However, several retailers noted a drop in sales of luxury products. Contacts anticipated a moderate increase in sales and decreased inventory levels over the next few months. Auto sales dropped markedly and fell below year-ago levels, but sale were expected to pick-up modestly in the months ahead. Auto inventories increased from the previous month and were expected to rise further. Restaurant sales weakened further and were flat versus a year ago, with contacts expecting moderate improvements over the next few months. District tourism activity picked up slightly in December, but remained lower than a year ago. Tourism contacts in the Rocky Mountain region expected some strengthening in activity as the winter ski season begins.
Manufacturing and Other Business Activity
Manufacturing activity declined moderately, while other business activity was mixed. The decline in manufacturing activity was noted among both durable and nondurable goods, particularly for food and beverage, computer and electronic equipment, and machinery production. The weakest activity continued to be in states with relatively large energy sectors. Production, shipments, and new orders decreased moderately and remained lower than a year ago. Manufacturers' capital spending plans improved, and expectations for future activity remained at solid levels. Professional and high-tech firms continued to report moderate increases in activity, with sales well above year-ago levels and solid expectations for future months. In contrast, transportation and wholesale trade contacts noted sharp declines in activity, although many firms expected activity to rise steadily in the months ahead. Professional and high-tech firms reported favorable capital spending plans, while transportation and wholesale trade firms expected capital spending to fall moderately.
Real Estate and Construction
District real estate activity increased slightly in December, and expectations remained positive but were lower than the previous survey. Residential real estate sales declined moderately and were below year-ago levels, with many contacts citing seasonal factors for much of the slowdown. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Home inventories fell considerably, while home prices remained above year-ago levels. Contacts anticipated that seasonal factors and higher interest rates would slow overall activity in the residential real estate market in the months ahead. Residential construction and construction supply firms reported a slight expansion as sales and construction starts were above levels in the previous survey period and one year ago. Commercial real estate activity continued to expand at a modest pace in December as absorption rates, completions, construction underway, sales, and prices increased and vacancy rates were flat. The commercial real estate sector was expected to continue to strengthen at a modest pace over the coming months.
Banking
Though most bankers continued to report steady overall loan demand, fewer contacts noted stronger demand compared to the results of the last survey period. 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, most 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, a strong majority of respondents reported stable deposit levels.
Energy
Tenth District energy sector activity contracted at a slightly faster pace compared with the previous survey, and expectations became more negative. The number of active oil and gas drilling rigs fell, and several contacts anticipated lower oil production in the first half of 2016 due to reduced capital spending and rig counts. Mergers and acquisitions and defaults/bankruptcies were projected to increase in 2016 as a result of low cash flows, hedges rolling off, and reductions to credit. Employment in the sector continued to decline with several contacts expressing concern about the loss of experienced personnel. The price of oil fell modestly compared to the previous period, and it was expected to ease further in the coming months. Natural gas spot prices fell to levels not seen since the late-nineties, with warmer-than-normal temperatures across the U.S. combined with abundant inventories contributing to the decline in oil and natural gas prices.
Agriculture
Agricultural commodity prices generally remained low since the previous reporting period, keeping farm income expectations subdued. Although crop prices increased slightly in December, a strong fall harvest kept corn prices near year-ago-levels, with soybean prices significantly less than a year ago. Wheat prices also remained lower than year-ago levels alongside solid winter growing conditions throughout the District. In the livestock sector, both cattle and hog prices were significantly below year-ago levels as supplies have steadily increased and global demand has been relatively weak. Both crop and livestock prices remained below the cost of production for some producers, continuing to strain farm income and cash flow. District contacts expected income to remain relatively soft in the coming months.
Wages and Prices
Prices were mixed across sectors, while wage growth remained generally steady across the District. Retail input prices grew at a faster pace compared to the previous survey, while selling prices remained unchanged. Restaurant input and menu prices experienced faster growth than in the previous month. Raw materials prices in the manufacturing sector declined more rapidly, and finished goods prices continued to decline slightly. Manufacturers expected raw materials prices to increase in the coming months and anticipated that selling prices would remain unchanged. Transportation input and selling prices declined and were expected to continue falling over coming months. Construction prices held steady since the previous survey period. Restaurant contacts reported steady wage growth, while retail sector wages grew at a slightly faster rate. The transportation sector experienced a moderate decline in wage growth. Respondents noted shortages for management and skilled workers, along with a continued need for drivers and technicians.