Beige Book Report: Kansas City
April 18, 2018
Summary of Economic Activity
Overall economic activity expanded at a moderate pace in March, although more modest growth was reported across a few District sectors. Consumer spending, energy, and manufacturing activity increased at a moderate pace, while District real estate and business services firms reported a modest pace of growth. Bankers reported a moderate increase in overall loan demand, steady deposit levels, and a modest increase in loan quality. Agricultural conditions remained weak, as drought conditions emerged and production expectations declined. Employment and employee hours increased in most sectors, and contacts reported modest wage growth with moderate increases expected in coming months. Input prices were up moderately compared to the previous survey period, while selling prices rose modestly.
Employment and Wages
Employment and employee hours across the District continued to rise modestly in March, and respondents expected continued modest increases moving forward. Contacts in all sectors reported steady-to-increasing employment, with the exception of those in the transportation sector who noted a moderate decline. Employment in all sectors was expected to grow in the months ahead. Employee hours declined in the auto sales and transportation sectors, but rose in all other reporting industries. Respondents noted a shortage of commercial drivers, skilled technicians, and service workers.
Contacts in most sectors reported modest wage growth and expectations were for moderate wage growth moving forward.
Prices
Overall, input prices were up moderately compared to the previous survey period, while selling prices grew at modest pace. Respondents in the retail sector reported moderately higher input and selling prices, and anticipated continued moderate rises in both. Restaurant input prices were up moderately, while selling prices edged up slightly. Transportation contacts reported modest growth in both input and selling prices, but at a slower pace than in the prior survey. Prices in the construction sector continued to rise moderately, with strong increases expected in the coming months. Manufacturers noted a modest increase in prices for finished goods, while raw material costs rose moderately. Manufacturers expected moderate growth in both finished goods and raw material prices over the next few months.
Consumer Spending
Consumer spending grew moderately in March, and firms expected strong growth in coming months. Retail sales increased robustly compared to the previous survey period, and remained well above year-ago levels. Several retailers noted an increase in sales for appliances and lower priced items, while outdoor and higher-priced products sold poorly. Retail contacts anticipated sales to rise considerably in the next few months, and inventory levels were expected to increase moderately. Auto sales rose modestly after many months of decline and were equal to year-ago levels. Dealer contacts anticipated a strong pickup in sales for the months ahead, and inventory levels were expected to increase considerably. Restaurant sales declined moderately and were well below year-ago levels. However, contacts expected a strong rebound in activity heading forward. District tourism activity fell slightly, but contacts expected activity to increase moderately heading into the summer months.
Manufacturing and Other Business Activity
Manufacturing activity continued to expand at a moderate pace, and the majority of other business contacts reported modest sales increases. Durable goods manufacturers reported sustained growth in production, particularly for machinery and aircraft, while growth in nondurable goods activity moderated slightly. Shipments and order backlog grew at a modest pace, and activity was higher than a year ago. Manufacturers' capital spending plans rose moderately, and firms' expectations for future activity remained strong.
Outside of manufacturing, professional, high-tech, and wholesale trade firms reported modest sales growth, while transportation contacts noted a moderate decrease in activity. All firms expected sales to improve moderately in the next six months. Professional and high tech contacts anticipated moderate growth in capital spending plans, while transportation and wholesale trade firms expected capital spending to be relatively flat in coming months.
Real Estate and Construction
Real estate activity in the District continued to increase at a modest pace, and additional gains were expected in the months ahead. Residential home sales rose modestly, while home prices and inventories increased at a slight pace compared to the previous survey period. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential sales and home prices were expected to increase at a moderate pace in the months ahead, although one contact in Colorado reported that the typical spring seasonal pick-up in activity was slow to begin this year. Residential construction activity was mixed as construction supply contacts noted lower sales while builders reported moderately higher housing starts and traffic of potential buyers. Commercial real estate activity continued to rise at a modest pace, and expectations were for additional gains moving forward.
Banking
Bankers reported a moderate increase in overall loan demand for the month of March. Respondents reported a modest increase for commercial real estate loans and slightly improved demand for commercial and industrial and residential real estate loans. Consumer installment loans were down slightly, while agricultural loans were steady. Bankers indicated loan quality improved modestly compared to a year ago. In addition, respondents expected a modest increase in loan quality over the next six months. Credit standards remained largely unchanged in all major loan categories. Overall, bankers reported steady deposit levels.
Energy
Energy activity expanded moderately since the last survey period, and expectations remained cautiously optimistic. The number of active oil and gas rigs increased slightly, while oil production continued to grow. Respondents said the price they needed to be profitable in the areas in which they were active inched up slightly, and they expected mostly stable oil prices over the next six months due to strong domestic production. The majority of contacts said potential steel and aluminum tariffs would have a low-to-medium impact on their drilling costs, and several have already experienced moderate increases in the cost of steel. The natural gas market continued to be oversupplied, straining available takeaway capacity in Oklahoma.
Agriculture
In the Tenth District, farm income and credit conditions remained weak, and the short-term outlook for the agricultural sector has been influenced by 2018 crop production expectations and drought. Approximately half of winter wheat acres in Kansas and Oklahoma were rated as poor or very poor due to abnormally dry conditions. Corn production was expected to remain unchanged or decline slightly in all District states. After very strong growth in 2017, production of soybeans was expected to remain relatively unchanged in most states, while cotton production in Oklahoma was forecasted to continue to expand due to higher prices relative to other crops. Lower production expectations for corn, soybeans and wheat supported slightly higher prices. However, District contacts continued to express concerns about severe drought, cash flow shortages, decreasing liquidity among farm borrowers, high production expenses and trade uncertainty.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy