Beige Book Report: Kansas City
November 29, 2017
Summary of Economic Activity
Economic activity in the Tenth District increased moderately in October and early November, and most sectors expected continued moderate growth in future months. Transportation and manufacturing contacts reported a strong increase in activity, and professional, high-tech, and wholesale trade activity expanded at a moderate pace. District real estate activity continued to increase at a slight pace, while consumer spending contacts indicated growth was unchanged since the previous survey period. District energy activity continued to grow modestly and bankers reported steady overall loan demand, stable deposit levels, and unchanged loan quality. Agricultural conditions weakened but at a slower pace, with subdued farm income and lower farmland values in most areas. Employment and employee hours increased in most sectors, and contacts reported modest wage growth with further moderate increases expected. Input and selling prices were up moderately over the previous survey period in most sectors.
Employment and Wages
Respondents in the wholesale trade, professional services, real estate, and manufacturing sectors reported an increase in employment, while respondents in the auto industry noted a slight decline. A significant majority of respondents in the District expected either increasing or unchanged employment levels in the next twelve months, due primarily to higher expectations of sales growth. Contacts in the manufacturing sector and most of the services sector with the exception of the auto industry reported rising employee hours. Respondents noted a shortage of commercial drivers, skilled technicians, and service workers. The primary factors cited as restraining hiring plans were a desire to keep operating costs low followed by the lack of available qualified workers.
Contacts in most sectors reported modest wage growth and expectations were for moderate wage growth in the coming months. Additionally, the majority of District contacts noted rising wages for both new and existing employees.
Prices
Overall, input prices were up moderately compared to the prior survey period, and selling prices also increased at a moderate pace. Respondents in the retail sector reported moderately higher input and selling prices, with both expected to rise strongly moving forward. Restaurant input prices increased moderately, while selling prices edged up. Transportation contacts reported moderate growth in both input and selling prices and anticipated strong increases in the coming months. Construction prices continued to increase at a moderate pace with modest increases expected in the next few months. Manufacturers reported a slight increase in prices for finished goods, while raw material costs continued to edge higher. Manufacturers anticipated moderate growth in both finished goods and raw materials prices over the next few months.
Consumer Spending
Consumer spending activity was mostly flat in October and early November, while expectations for future growth increased at a moderate pace. Retail sales increased moderately over the previous survey period, and remained above year-ago levels. Several retailers noted an increase in sales for lower priced and discounted items, while higher-priced products sold poorly. Contacts anticipated sales to rise considerably in the next few months, and inventory levels were expected to increase moderately. Auto sales continued to fall moderately and were well below year-ago levels. Dealer contacts anticipated a moderate pickup in sales for the months ahead. Auto inventories were expected to remain stable heading forward. Restaurant sales increased slightly and were modestly above year-ago levels. Contacts expected a mild decline in activity heading forward. District tourism activity was slightly lower than the previous survey and below year-ago levels. Tourism contacts expected activity to increase moderately heading into the winter months.
Manufacturing and Other Business Activity
Manufacturing activity expanded at a strong pace in October and early November, and the majority of other business contacts reported moderate to strong sales increases. Manufacturers reported sustained growth in production, particularly for metals, plastics, and electronics products. Shipments, new orders, and order backlog grew at a solid pace, and activity was higher than a year ago. Manufacturers' capital spending plans rose moderately, and firms' expectations for future activity remained favorable.
Outside of manufacturing, transportation firms reported strong sales increases, while professional, high-tech, and wholesale trade contacts indicated more moderate growth. All firms expected a strong improvement in sales in the next six months. Professional, high-tech, and wholesale trade firms reported modest growth in capital spending plans, while transportation firms anticipated a moderate decrease in capital expenditures heading forward.
Real Estate and Construction
District real estate activity continued to expand at a slight pace in October and early November. Residential home sales remained steady since the previous survey period, but expectations for home sales were modestly negative in the coming months. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential home prices rose modestly, while inventories fell further. Residential construction activity edged up, as construction supply sales increased modestly while new home starts were flat and traffic of potential buyers fell moderately. Commercial real estate activity continued to expand at a modest pace as absorption, completions, and sales rose, while vacancy rates declined. Activity in the commercial real estate sector was moderately above year-ago levels, and expectations were positive moving forward.
Banking
Bankers reported steady overall loan demand for the month of October. A majority of respondents indicated a stable 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, results for the trends in deposits were varied with no discernible majority.
Energy
Tenth District energy activity continued to grow modestly and expectations for future activity were positive. The number of active oil and gas rigs moderated somewhat, particularly oil rigs in Oklahoma. Still, oil and gas production was expected to increase since most drilling activity focused on development rather than exploration. Activity picked up modestly in New Mexico's San Juan Basin and Colorado's Denver-Julesburg Basin. Activity in Oklahoma's Arkoma basin, a predominately natural gas play, also expanded modestly since the last survey period. Respondents continued to focus on operating within cash flows, but said private equity capital remained readily available.
Agriculture
The District farm economy and credit conditions continued to weaken since the previous reporting period, but the pace of the declines slowed. Farm income remained weak in November, which continued to reduce working capital and increase demand for financing. Farm loan repayment rates also generally declined, but at a more moderate pace than in the previous reporting period. District contacts reported that stronger livestock markets and expectations of a strong fall harvest kept loan repayment rates from declining more sharply. Farmland values also moderated further in most areas, but remained steady in areas where crop production was particularly high. District contacts noted that credit monitoring has increased slightly and interest rates on farm loans have edged higher alongside the elevated risk in the sector. However, most contacts expected only minimal sales of farm assets to improve cash flow and working capital.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy