Beige Book Report: Kansas City
July 18, 2018
Summary of Economic Activity
Economic activity in the Tenth District continued to increase at a moderate pace in late May and June, and expectations were for additional gains in the coming months. Consumer spending and business services activity rose modestly compared to the previous survey period, and residential and commercial real estate activity climbed moderately higher. Manufacturing activity continued to expand at a robust pace, and manufacturers and business services contacts anticipated stronger capital spending in the months ahead. Banking contacts reported increased loan demand, improved loan quality, and slightly lower deposit levels. Respondents in the energy sector reported a slight pickup in overall activity and expected strong levels of capital spending. Agricultural conditions weakened slightly as trade uncertainty and expectations of large supplies put downward pressure on crop prices. Employment increased modestly since the previous survey period, and a large share of contacts reported labor shortages. Wages, input prices, and selling prices moved moderately higher, and most contacts expected additional increases moving forward.
Employment and Wages
District employment and employee hours continued to increase at a modest pace in late May and June, and additional gains were anticipated in the months ahead. A majority of contacts in every sector noted rising levels of employment since the previous survey period, with the exception of those in the auto sales sector who noted a modest decline. In addition to rising employment levels, employee hours increased in the retail trade, wholesale trade, real estate, restaurant, tourism, manufacturing, and energy sectors. A high percentage of contacts in the District reported labor shortages for some skillsets, especially within the manufacturing sector. In particular, contacts noted difficulty finding retail sales staff, skilled IT workers, commercial drivers, and restaurant workers.
Wages increased moderately in most sectors, and firms expected a similar pace of growth in the months ahead.
Prices
Input and selling prices rose further since the previous survey period and were moderately higher than year-ago levels. Respondents expected further increases in the coming months. Contacts in the retail sector noted modestly higher input and selling prices compared to the previous survey period, and both were moderately higher than year-ago levels. In the restaurant sector, input prices rose modestly and selling prices picked up at a moderate pace. Input and selling prices in the transportation sector were moderately above year-ago levels. Construction supply contacts noted moderately higher prices, although the rate of growth was expected to slow slightly moving forward. Manufacturers reported a modest increase in the prices of finished products, and raw materials prices rose moderately. Manufacturers expected the pace of price increases to accelerate in the months ahead for both finished products and raw materials.
Consumer Spending
Consumer spending increased modestly compared to the previous survey period, and firms were optimistic that spending will continue to rise. Retail sales rose moderately since the previous survey period and remained above year-ago levels. Several retailers noted a pickup in sales for appliances, home improvement items, and lower-priced goods, while higher-priced products sold poorly. Retail contacts anticipated moderate increases in sales and modestly higher inventories moving forward. Auto sales rose modestly since the previous survey period but were slightly below year-ago levels. However, dealer contacts expected sales and inventories to rise in the months ahead. Restaurant sales edged up slightly compared to both the previous survey period and year-ago levels, and respondents expected modest sales growth in the next few months. District tourism activity expanded at a moderate pace compared to the previous survey period, although tourism sales were below year-ago levels. Tourism activity was anticipated to decline modestly in the next few months.
Manufacturing and Other Business Activity
Manufacturing activity continued to expand robustly, and the majority of other business contacts reported modest sales increases. Factory activity grew at both durable and nondurable goods plants, especially for computer, electronics, and food products. Production, shipments, and new orders increased moderately, and activity remained higher than a year ago. Manufacturers' capital spending plans grew moderately, and manufacturers expressed strong optimism about future levels of activity.
Outside of manufacturing, firms in the professional, high-tech, wholesale trade, and transportation sectors reported modest sales growth, and expectations were for a faster pace of growth in the months ahead. Transportation contacts anticipated a modest increase in capital spending in the coming months, while professional, high-tech, and wholesale trade firms expressed more robust plans for capital expenditures.
Real Estate and Construction
District real estate activity rose at a moderate pace, and additional growth was expected in the months ahead. Contacts in the residential real estate sector noted moderately higher home sales, prices, and inventories compared to year-ago levels. Continued moderate growth was expected for home sales and prices, while inventories were projected to remain flat. Residential construction activity strengthened slightly in late May and June including stronger housing starts and sales of construction supplies. However, traffic of potential buyers declined modestly since last year. Residential construction contacts expected a slight pickup in activity in the months ahead. The commercial real estate sector grew at a moderate pace as absorption, completions, and sales rose while vacancy rates declined. Commercial real estate activity was projected to expand at a slightly faster pace moving forward.
Banking
Bankers reported a moderate increase in overall loan demand in late May and June. Respondents reported a modest increase for commercial and industrial, commercial real estate, residential real estate, consumer installment, and agricultural loans. Bankers indicated loan quality improved modestly compared to a year ago and expected further improvement in the next six months. Credit standards remained largely unchanged in all major loan categories, and bankers reported a slight decrease in deposit levels.
Energy
District energy activity expanded slightly since the last survey period, while expectations for future activity continued to grow moderately. The number of active oil rigs increased modestly, and the number of active gas rigs remained unchanged. Most firms reported continued strong capital spending plans, although several businesses expressed concern about pipeline capacity. Despite persistent growth in global oil demand, contacts projected slightly lower oil prices which a number of firms attributed to the announcement of OPEC's production increases. Expectations for natural gas prices improved further.
Agriculture
The Tenth District farm economy weakened slightly, and drought persisted in some regions. Trade uncertainty and expectations of larger supplies in 2018 put downward pressure on crop prices. Corn prices were slightly lower than a year ago following a sharp decline in June, while soybean prices declined even more rapidly and reached an eight-year low. Although prices for wheat remained steady and slightly higher than a year ago, revenues in Kansas and Oklahoma could remain strained as nearly half of winter wheat acreage was rated as poor or very poor due to dry conditions. Livestock prices were slightly lower than one year ago following modest declines in June. Hog prices, which continued to be supported by expectations of increased U.S. exports and relatively strong global demand, increased slightly in June but remained slightly below levels from one year ago.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy