Beige Book Report: Kansas City
September 7, 2016
Economic activity in the Tenth District was largely flat since the previous Beige Book period, although expectations remained mostly positive. Energy activity edged higher from low levels on expectations of higher prices, and the commercial real estate market strengthened slightly. Professional and high-tech firms also reported moderate increases in activity, and bankers reported steady loan demand, stable deposit levels, and overall consistent loan quality. However, consumer spending was mostly flat, and residential real estate activity slowed. Transportation and wholesale trade contacts also noted a slowdown in sales, and district manufacturing firms reported modest declines in activity. Agricultural conditions remained subdued with weak profit margins, although prices and growing conditions improved slightly. Input prices increased slightly, while selling prices were mixed across sectors. Wages continued to grow modestly in most industries with some labor shortages reported for selected skilled positions.
Consumer Spending
Consumer spending was mostly flat since the previous survey period, and expectations for future activity were mixed across sectors. Retail sales declined over the previous survey period but remained slightly above year-ago levels. Several retailers noted that luxury products sold poorly, while sales of building materials and home improvement items improved. Contacts anticipated a modest increase in sales the next few months, with inventory levels expected to rise slightly. Auto sales increased at a moderate pace and remained generally flat compared with a year ago. Auto dealers expected a modest increase in sales for the months ahead. Auto inventories decreased and were expected to continue falling in coming months. Restaurant sales increased moderately and were well above year-ago levels, although contacts expected some slowing in the months ahead. District tourism activity slowed modestly with the end of the summer tourist season, and remained slightly lower than a year ago. Contacts expected some further weakening in activity for the fall months.
Manufacturing and Other Business Activity
Manufacturing activity declined modestly in late July and August, while most other business activity was mixed. The decline in manufacturing came mainly from durable goods factories, particularly for metal, plastics, and aircraft products. Factory activity remained weak in most District states. Production, shipments, new orders, and export orders all declined, and capital spending plans were lower than a year ago. Expectations for future activity, however, remained moderately positive.
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 a modest decrease in activity, though many transportation firms expected modest 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 slightly in August as commercial real estate activity expanded while the residential market slowed. Residential sales and inventory were modestly lower than both the previous survey and the same time last year. Respondents expected a further decrease in residential sales and inventory in the months ahead, with some contacts citing normal seasonal effects for the slowdown. Residential home prices were strongly up over last year, but expectations for the coming months were flat. Sales of low- and medium-priced homes continued to outpace sales of higher priced homes. Activity among residential construction firms slowed slightly. Housing starts and sales decreased while inventories were up modestly over both the previous survey period and same time last year. Commercial real estate activity expanded slightly as absorption, completions, construction underway, prices and vacancy rates increased. Expectations for the commercial real estate market were for continued moderate expansion.
Banking
Most bankers reported steady overall loan demand for the period from late July through August. 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 majority of respondents expect 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
District energy activity edged higher from low levels, and the outlook remained slightly positive. There was an uptick in the number of active oil and gas drilling rigs, attributed to increased expectations of higher oil prices. Some respondents were more confident than in the previous survey that global demand and supply would rebalance before year-end 2017. However, some local producers continued to shed non-strategic assets to help lower debt levels and continued to operate with fewer employees. Natural gas prices were mostly unchanged since the previous survey period but higher than earlier in the year. Higher summer prices were mostly driven by strong seasonal demand, lower production and smaller-than-expected additions to inventories.
Agriculture
District farm income and agricultural credit conditions softened moderately since the last survey period. Following an early June rally, crop prices declined in late July and August due to expectations that a strong wheat harvest and favorable growing conditions for fall crops would generate excess supply. Cattle prices also remained well below year ago levels, despite a slight uptick in early August. Although agricultural loan delinquency rates remained low, bankers reported increased demand for farm loan extensions and weaker loan repayments rates. Additionally, District bankers reported modest increases in the severity of agricultural loan repayment problems. Financial strain was particularly high in the western portion of the District due to the combination of subdued commodity prices and increased drought stress. Lower commodity prices, softer farm income and weaker credit conditions continued to push farmland values lower throughout the District when compared with a year ago.
Wages and Prices
Input prices in most sectors increased slightly since the previous survey period, while selling prices were mixed and wages continued to grow modestly. Retail input prices rose slightly, and selling prices increased moderately. Input prices for restaurants held steady after falling in the previous survey, though menu prices rose modestly. Transportation input prices increased at a slower pace than in the prior survey, while selling prices decreased slightly. Construction prices increased moderately, with further increases expected. Manufacturers reported continued slight declines in finished goods prices, despite modest increases in raw material costs. Manufacturers expected both finished goods and raw materials prices to rise in the next few months. Contacts in retail and transportation sectors reported moderate increases in wages, while restaurant sector wages held steady. Contacts in these sectors expected wages to increase slightly moving forward. Respondents reported a shortage of commercial drivers, salespeople, and skilled technicians.