Beige Book Report: Kansas City
May 31, 2017
Summary of Economic Activity
Economic activity in the Tenth District continued to increase moderately in April and early May, and most sectors expected continued growth in future months. Professional, high-tech, and transportation firms reported a strong increase in sales, and manufacturing activity expanded at a moderate pace. District real estate activity rose moderately, and consumer spending contacts reported a modest increase in sales. District energy activity also expanded modestly compared to the previous survey period, and bankers reported steady overall loan demand, stable deposit levels, and a slight decline loan quality. Agricultural credit conditions remained weak, with subdued farm income and continued low commodity prices. Employment and employee hours continued to increase at a modest pace in late April and May, and contacts in most sectors reported moderate wage growth. Input prices were up slightly over the previous survey period, while selling prices held steady in most sectors.
Employment and Wages
Overall District employment and employee hours continued to increase at a modest pace in late April and May, and expectations were positive for the coming months. Contacts in the retail, wholesale trade, transportation, professional and high-tech, real estate, tourism, and manufacturing sectors noted an increase in employment over the previous survey period, while contacts in the auto, health services, and restaurant industries noted a decline. All sectors except auto, restaurants, and tourism reported positive expectations for employment in the coming months. Average employee hours for the services sector rose modestly over the previous survey period, and the manufacturing sector saw a slight decline but was on par with year-ago levels. Average employee hours' expectations for both the services and manufacturing sectors were positive. Respondents noted a shortage of commercial drivers, skilled technicians, and service workers.
Contacts in most sectors reported moderate wage growth, and anticipated continued moderate wage growth in the coming months.
Prices
Overall, input prices were up slightly compared to the prior survey period, while selling prices rose or held steady, and contacts expected additional price increases in the months ahead. Respondents in the retail sector reported modestly higher input and selling prices, with both expected to rise moderately moving forward. Restaurant input prices were up slightly, while selling prices held steady. In the transportation sector, input prices edged up and selling prices were stable. Construction prices rose moderately, and expectations were for moderate price increases in the coming months. Manufacturers reported slight growth in prices for finished goods, and raw material costs continued to edge higher. Manufacturers anticipated modest increases in both finished goods and raw material prices over the next few months.
Consumer Spending
Consumer spending activity continued to rise modestly, while expectations for future growth increased at a strong pace. Retail sales expanded slightly over the previous survey period and were moderately above year-ago levels. Several retailers noted an increase in sales for outdoor and sale items, while luxury products sold poorly. Contacts anticipated sales to rise strongly in the next few months, and inventory levels were expected to moderate. Auto sales fell modestly but were above year-ago levels. Dealer contacts anticipated a strong increase in sales for the months ahead. Auto inventories were expected to remain mostly flat heading forward. Restaurant sales fell moderately but were above year-ago levels. Contacts expected a strong rebound in activity heading forward. District tourism activity increased moderately and remained above year-ago levels. Tourism contacts expected strong activity heading into the summer months.
Manufacturing and Other Business Activity
Manufacturing activity expanded at a moderate pace in April and early May, and most other business contacts reported increased sales. Manufacturers reported continued modest growth in production, particularly for metals, machinery, and aircraft products. Shipments, new orders, and order backlogs expanded slightly, and activity was modestly higher than a year ago. Manufacturers' capital spending plans were mostly positive, and firms' expectations for future activity remained favorable.
Outside of manufacturing, professional, high-tech, and transportation firms reported strong sales increases, while wholesale trade contacts indicated a smaller increase in sales than the previous survey. All firms expected a moderate improvement in sales in the next six months. Professional, high-tech, and wholesale trade firms reported strong capital spending plans, while transportation firms anticipated more modest growth in capital expenditures heading forward.
Real Estate and Construction
District real estate activity rose at a moderate pace since the previous survey period, and contacts expected additional gains moving forward. Residential home sales and prices were slightly higher than year-ago levels and expectations were for continued growth. Sales of low- and medium-priced homes outpaced sales of higher-priced homes. Inventories in residential housing were moderately below year-ago levels, but expectations were for a modest increase in the months ahead. Activity in residential construction increased at a moderate pace as new home sales, housing starts, and inventories rose. Commercial real estate activity continued to increase at a modest pace over the previous survey period as vacancy rates declined and absorption, completions, construction, sales, prices and rents rose. The commercial real estate sector was expected to increase at a modest pace in the coming months.
Banking
Bankers reported steady overall loan demand for the period from April through early May. A majority of respondents indicated a steady demand for commercial and industrial, residential real estate, agricultural and consumer installment loans. While most bankers reported stable demand for commercial real estate loans, a relatively higher proportion than other types indicated increasing demand. Most bankers indicated loan quality was unchanged compared to a year ago, although nearly one third reported a slight decline in quality. 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
District energy activity expanded modestly compared to the prior survey period, and expectations remained positive. The announcement by OPEC and Russia to maintain production quotas through early 2018 was seen as contributing toward rebalancing the oil oversupply. The number of active oil and gas drilling rigs continued to increase, particularly in Oklahoma. Some respondents commented that mostly stable prices have helped promote increased drilling activity, but they continued to closely monitor the effects of price changes on budgets. Contacts also reported further slight increases in services costs for well completions.
Agriculture
Persistently weak farm income continued to weigh on the District's farm economy and agricultural credit conditions. District contacts reported that wheat and corn prices remained below profitable levels. Soybean prices were also lower than in the previous year, but remained mostly profitable. Cattle prices increased since the previous reporting period and feedlots reported a modest increase in profits. However, adverse weather and wildfires in the western portion of the District reduced production expectations for cattle and wheat in the region. More generally, bankers in the western portion of the District reported a sharper decline in farm income and credit conditions than bankers in the eastern portion. Overall, District bankers continued to report weaker repayment rates on agricultural loans and an increase in borrowers with carry-over debt.