Beige Book Report: Kansas City
April 13, 2016
Economic activity in the Tenth District increased slightly since the prior Beige Book, with continued mixed conditions across sectors. Consumer spending and District real estate activity increased modestly, and transportation and wholesale trade firms noted a sharp rise in sales. Professional and high-tech firms reported moderate increases in activity, and bankers reported slightly higher loan demand, stable deposit levels, and overall steady loan quality. On the other hand, energy activity continued to decline moderately, and District manufacturing firms reported persistent declines in activity. Agricultural conditions remained subdued with weak profit margins, although prices and growing conditions improved slightly. Input prices were mixed across sectors, while selling prices were steady or declined slightly. Although wage pressures were mostly contained, contacts in the retail and restaurant industries reported modest increases.
Consumer Spending
Consumer spending activity increased modestly in March, and expectations were positive in most sectors. Retail sales improved considerably over the previous survey period and were above year-ago levels. Several retailers noted an increase in sales for used and lower-priced items, while luxury and cold-weather products sold poorly. Contacts anticipated a moderate increase in sales the next few months, with inventory levels expected to rise modestly. Auto sales continued to decline at a moderate pace and remained below year-ago levels, although dealer contacts expected a modest pickup in sales for the months ahead. Auto inventories decreased but were expected to rise slightly in coming months. Restaurant sales increased sharply and were well above year-ago levels, with contacts expecting further improvements in the months ahead. District tourism activity continued to decline, but at a slower pace, and remained lower than a year ago. Contacts reported weak energy-related business travel but continued solid activity at ski resorts. Tourism contacts expected some weakening in activity for the months ahead.
Manufacturing and Other Business Activity
Manufacturing activity continued to decline in March, while most other business activity increased moderately. The continued decline in manufacturing came from both durable and nondurable goods factories, particularly for steel, plastics, and paper products. Factory activity remained weak in most District states. Production, shipments, and export orders were all lower than in the last survey period. Manufacturers' capital spending plans continued to decline, and expectations for future activity weakened modestly.
Outside of manufacturing, professional and high-tech firms reported a moderate increase in sales, with further improvements expected in future months. Transportation and wholesale trade contacts noted sharp increases in activity, and many firms expected continued growth in sales the next three months. Professional, high-tech, and wholesale trade firms reported favorable capital spending plans, while transportation contacts expected capital spending to fall modestly.
Real Estate and Construction
District real estate activity increased modestly in March, and further growth was expected in the coming months. Residential real estate sales and home prices increased moderately since the previous survey period as well as compared to the same time last year. However, a contact in Oklahoma noted slower sales due to a weak energy sector. Numerous contacts in the residential real estate market continued to cite low inventory as a driving factor of growth. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Expectations for sales and home prices were strong, and inventories were expected to fall further over the coming months. Residential construction firms reported an increase in construction starts and traffic of potential buyers, and expectations were positive for the coming months. Construction supply contacts noted moderate growth in sales and flat inventory levels. Commercial real estate activity increased modestly as sales, construction underway, completions, and absorption were up over year-ago levels and vacancy rates declined. The commercial real estate sector was expected to continue to strengthen at a modest pace over the coming months.
Banking
Though most bankers reported steady overall loan demand, the proportion indicating stronger demand increased slightly compared to results from the last survey. Respondents indicated a steady demand for commercial and industrial, commercial real estate, agricultural and consumer installment loans. While a majority of respondents reported steady demand for residential real estate, the proportion indicating stronger demand increased from the last survey. Most bankers indicated loan quality was unchanged compared to a year ago. In addition, most respondents expect loan quality to remain essentially the same over the next six months. Credit standards remained largely unchanged in all major loan categories, and a majority of respondents reported stable deposit levels.
Energy
Energy activity continued to decline moderately, and expectations remained negative. The number of active oil and gas drilling rigs declined at a similar pace as the last survey period. Most respondents expected domestic oil production to decline this year, as a result of low rig counts and reduced capital spending. The average oil price needed to be profitable continued to fall among local producers but remained modestly higher than their year-end price outlook. Most producers also reported concerns about high global oil inventories and the potential negative effects on prices. In the natural gas market, high inventory levels and continued strong production weighed on prices.
Agriculture
The District farm economy remained subdued since the previous reporting period, though crop prices improved slightly and growing conditions were mostly positive. Crop prices increased moderately in March, but were generally below previous-year levels. Some crop input prices, such as fertilizer and diesel prices, moderated from year-ago levels, but profit margins were expected to remain relatively weak due to suppressed commodity prices. Growing conditions for winter wheat in Oklahoma and Kansas were primarily rated between fair and good, but conditions deteriorated slightly from the previous month due to somewhat warmer weather and relatively little precipitation. Despite a brief rebound in March, livestock prices were significantly lower than a year ago, and profit margins at cattle feedlots remained soft, as livestock prices have decreased more than input costs over the past year.
Wages and Prices
Selling prices in most sectors were steady or declined, while input prices were mixed and wages increased slightly. Retail input prices increased modestly, though selling prices were flat. Restaurant menu prices grew slightly, and input prices were steady. Transportation input prices rose modestly with further increases expected, while selling prices were unchanged. Construction prices experienced slight increases and were expected to continue to grow. Manufacturers reported continued slight declines in raw materials and finished goods prices, with stable prices expected in coming months. Retail contacts reported modest wage increases, the first since the end of last year. Wages in transportation were steady, while restaurant wages experienced slight increases. Contacts in both of these sectors, however, expected wages to increase in the near future. Respondents noted a shortage for commercial drivers, technicians, and retail salespeople.