Beige Book Report: Kansas City
January 17, 2018
Summary of Economic Activity
Economic activity and employment in the Tenth District increased at a modest pace in late November and December, and most contacts expected growth in the coming months. Labor shortages were reported by the majority of contacts in the services sector, while wages rose modestly across most sectors. Retail sales grew sharply since the previous survey, but auto sales, restaurant sales, and tourism activity declined moderately. Overall activity and capital spending plans within the manufacturing sector rose moderately. Contacts in the transportation and professional and high-tech sectors noted growth in sales, while wholesale trade firms reported a sharp decline in overall activity. Real estate activity in the District was mixed as the residential sector declined modestly while commercial real estate activity rose slightly. Banking contacts reported steady overall loan demand, unchanged loan quality and credit standards, and stable-to-increasing deposit levels. Activity in the District energy sector increased modestly since the last survey period, and expectations for capital spending, especially in exploration and development, were positive. Low crop prices continued to weigh on District farm income expectations, and winter wheat production expectations declined further.
Employment and Wages
Employment across the District rose modestly in late November and December, and employee hours increased slightly. Respondents in the retail trade, wholesale trade, transportation, professional services, real estate, health services, manufacturing, and energy sectors noted an increase in both employment and employee hours compared to the previous survey period, while contacts in the auto sales, restaurant, and tourism sectors reported a decline. Employment was expected to increase over the next six months in all sectors except for retail trade which was projected to be flat. Additionally, respondents anticipated an increase in employee hours in most sectors.
The majority of respondents in the services sector reported labor shortages, including shortages for commercial drivers, skilled technicians, and service workers. Wages rose modestly in most sectors, and strong wage growth was anticipated in the coming months.
Prices
Input prices and selling prices were modestly higher in most sectors compared to the previous survey period. In the retail sector, both input and selling prices increased modestly, but at a slower pace than in the prior survey. Restaurant contacts reported a slight rise in input prices, while selling prices rose moderately. Respondents in the transportation sector noted moderate growth in both input and selling prices. Prices in the construction sector declined modestly for the first time in over two years, but were expected to rise moderately 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 increases in both finished goods and raw material prices in the coming months.
Consumer Spending
Consumer spending activity grew slightly in late November and December, and was expected to increase moderately in the next few months. Retail sales increased sharply compared to the previous survey period, and remained well 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 retail sales to continue to rise, while inventory levels were expected to decrease moderately in the coming months. Auto sales fell moderately since the previous survey but were above year-ago levels. Dealer contacts anticipated a moderate pickup in sales in the months ahead, and auto inventories were expected to remain stable. Restaurant sales also declined moderately in late November and December but were well above year-ago levels. In addition, restaurant contacts expected a strong pickup in activity heading forward. District tourism activity was moderately lower than the previous survey period and slightly below year-ago levels. However, tourism contacts expected activity to increase moderately heading into the winter months.
Manufacturing and Other Business Activity
Manufacturing activity expanded at a moderate pace in late November and December, while other business activity was mixed. Manufacturers reported sustained growth in production, particularly for food, aircraft, and electronics products. Shipments, new orders, and order backlogs grew at a modest pace since the previous survey period, and overall 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 and professional and high-tech contacts noted moderate sales growth. In contrast, activity among wholesale trade firms declined sharply. However, all firms expected a strong improvement in sales in the next six months. Professional, high-tech, and transportation firms reported moderate growth in capital spending plans, while wholesale trade firms anticipated spending to be relatively flat heading forward.
Real Estate and Construction
District real estate activity was mixed, with residential real estate conditions declining modestly and commercial real estate activity increasing slightly. Residential home sales were well below levels from the previous survey period and slightly below year-ago levels. Expectations for residential sales were positive in the coming months due to abating adverse seasonal factors. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential selling prices rose slightly, while inventories fell modestly. Residential construction activity was flat as both new home starts and construction supply sales remained at similar levels to the previous survey period. Activity in the commercial real estate sector increased slightly as sales rose modestly, absorption and construction underway edged slightly higher, rents and vacancy rates remained flat, and completions dropped slightly.
Banking
Bankers reported steady overall loan demand during the period of late November and December. A majority of respondents indicated a stable demand for commercial and industrial, commercial real estate, residential real estate, agricultural loans 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 stable over the next six months. Credit standards remained largely unchanged in all major loan categories. Overall, bankers reported steady-to-increasing deposit levels.
Energy
Energy activity increased modestly since the last survey period, and expectations remained positive. The number of active oil and gas rigs rose slightly, particularly in New Mexico and Wyoming. Respondents expected spending in all categories to increase in 2018, with the largest increases for exploration and development capital spending. Firms also expected slightly positive impacts in the near term due to tax reform. Abundant supply continues to weigh on natural gas prices, but several respondents stated that increasing LNG exports could help push up prices.
Agriculture
Farm income expectations remained weak in most of the Tenth District, but the outlook for agricultural commodities was mixed. Revenues for corn and soybeans are expected to be slightly lower than last year due to lower prices and yields. Large inventories continued to weigh on prices, and District contacts reported lower yields due to abnormally dry conditions and wind damage. Production expectations for winter wheat declined further since the last reporting period due to limited precipitation and extremely cold conditions that could cause freeze damage. Lower production expectations, however, supported moderately higher prices for winter wheat compared to a year ago. In the livestock sector, prices were higher than last year for cattle and hogs due to strong demand. Despite generally weak agricultural conditions, farmland values remained stable due to limited land sales. However, some bankers in the District expected more sales and declining values in the months ahead.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy