Beige Book Report: Kansas City
March 02, 2016
Economic activity in the Tenth District declined modestly in January and early February, but expectations for future activity continued to be positive outside of the energy and agriculture sectors. Consumer spending decreased modestly as sales in the retail, auto, restaurant and tourism sectors fell. Manufacturing activity continued its broad-based declinez, in part due to weak agriculture and energy sectors. Other business activity also remained subdued in January and early February, as transportation and wholesale trade contacts noted continued moderate declines while professional and high-tech firms reported mostly flat sales. District real estate activity edged down slightly, as seasonal factors continued to weigh on residential real estate activity and commercial real estate activity held steady. Most bankers reported steady loan demand and deposit levels and unchanged credit standards and loan quality. District energy activity declined further, with many contacts reporting decreased capital spending plans as well as lower financial borrowing bases. Farm income weakened further due to persistently low crop prices and sharp declines in cattle prices across the District. Contacts in most industries reported that input prices were increasing at a faster pace than selling prices and that wages held steady.
Consumer Spending
Consumer spending declined modestly since the previous survey period, and activity was weaker than a year ago. However, expectations were positive heading forward in most sectors. Retail sales fell modestly in January and early February, but were similar to year-ago levels. Several retailers noted a drop in sales for luxury products, while sales of products related to colder weather were favorable. Retail contacts anticipated a considerable increase in sales over the next few months; nonetheless, inventory levels were expected to rise moderately. Auto sales continued to decline and remained below year-ago levels. However, auto dealer contacts expected a moderate pickup in sales for the months ahead. Auto inventories decreased but were expected to rise slightly in coming months. Restaurant sales were slightly below year-ago levels, but contacts expected solid improvements in the months ahead. District tourism activity declined moderately and remained lower than a year ago. However, resort areas of the District performed better, and tourism contacts expected some strengthening in activity in the months ahead.
Manufacturing and Other Business Activity
Manufacturing, transportation and wholesale trade activity continued to decline moderately in January and early February, while professional and high-tech services activity was flat. The decline in manufacturing came from both durable and nondurable goods factories, particularly for food and beverage, chemical, metals, and plastic production. Manufacturing activity was fairly weak throughout the Tenth District, in part due to continued sluggishness in agriculture- and energy-related manufacturing. Production, shipments, and new orders were all lower than in the last survey period. Manufacturers' capital spending plans fell moderately, even as expectations for future activity remained positive. Outside of manufacturing, professional and high-tech firms reported mostly flat sales, although sales were well above year-ago levels and expected to rise further in future months. Transportation and wholesale trade contacts noted continued moderate 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 modestly.
Real Estate and Construction
District real estate activity declined slightly since the previous survey period but remained above year-ago levels. Residential real estate sales and inventories edged down in January and early February but were above year-ago levels, as contacts continued to cite typical seasonal factors for the slowdown. Contacts also noted that a lack of inventory was putting downward pressure on sales, but expectations for sales in the months ahead were positive. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential home prices were higher than the previous survey period as well as the same time last year and were expected to continue to rise over the coming months. Residential construction firms reported a decrease in construction starts and traffic of potential buyers, and construction supply contacts noted a decrease in sales in late January and February. Commercial real estate activity was flat since the previous survey period. Commercial real estate sales decreased and vacancy rates edged up. However, the absorption rate, construction underway and construction completed increased. The commercial real estate sector was expected to grow slightly over the coming months.
Banking
Though most bankers reported steady overall loan demand, the proportion indicating weaker demand increased slightly compared to the results of the last survey. In particular, 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 majority of respondents reported stable deposit levels.
Energy
Energy activity declined moderately, and expectations remained pessimistic. The number of active oil and gas drilling rigs declined at a similar pace as in the last survey period, but most of the recent decline came from natural gas rigs, rather than oil rigs. Low oil prices continued to drive cuts in activity across the District. Several producers announced large cuts to their annual capital spending budgets during the survey period, and an increased number of producers expected further budget and payroll cuts along with selling assets to raise cash over the coming months. Some respondents also commented that financial borrowing bases were being reduced which was expected to create liquidity issues this year. In the natural gas market, prices remained weak but recovered slightly in January as demand picked up somewhat.
Agriculture
Tenth District farm income weakened further since the last survey period, and cropland values declined modestly. Persistently low crop prices and sharp declines in cattle prices contributed to lower farm income in all District states. District cropland values continued to decrease slightly, while ranchland values levelled off. Similarly, cash rental rates on all types of farmland moderated and were expected to fall further in the next three months. Alongside lower farm income, farm loan repayment rates weakened further, and demand increased for new loans as well as loan renewals and extensions. Looking forward, District contacts expected modest declines in cropland values as well as continued pressure on credit conditions amid tighter profit margins for crop and livestock producers.
Wages and Prices
Contacts in most industries reported that input prices were increasing at a faster pace than selling prices, and that wages held steady. Retail input prices increased moderately since the previous survey, while selling prices declined. Retailers expected input prices to continue rising faster than selling prices. Restaurant menu prices were steady this survey period, though input prices grew modestly. Transportation selling prices declined at a slower pace, and input prices increased slightly. Prices in construction continued to increase, and expectations were for additional gains. In contrast, manufacturers reported price declines for both raw materials and finished goods. However, respondents expected raw materials prices to increase over the coming months, while finished goods prices were expected to decline. Wages in the retail sector declined at a modest pace, but retailers did not expect this to continue in the coming months. Wages for restaurant and transportation positions increased, but at a slower pace than in the previous survey. Contacts reported a shortage of commercial drivers, skilled technicians, and retail salespeople.