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Beige Book Report: Kansas City
October 24, 2018
Summary of Economic Activity
Economic activity in the Tenth District increased at a moderate pace in September and early October. Consumer spending rose moderately, with contacts in the retail, auto, and tourism sectors noting higher sales than the previous survey period. Manufacturing activity continued to grow moderately, while contacts in the wholesale trade, transportation, and professional and high-tech sectors reported strong sales. Residential real estate sales continued to decline moderately, and expectations were for additional declines due in part to seasonal factors and higher interest rates. Commercial real estate activity expanded modestly. Energy activity accelerated, especially for oil, and additional gains were anticipated. Despite higher livestock prices, the outlook for District farm income remained subdued due to low crop prices. District employment was mixed across industries, and the majority of respondents reported labor shortages for both entry-level and skilled positions. Wage growth accelerated, and strong wage growth was anticipated in the coming months. Price gains also picked up, although growth in input prices generally outpaced that of selling prices.
Employment and Wages
District employment was mixed across industries since the previous survey, but contacts from most sectors reported rising employee hours. Contacts in the retail trade, wholesale trade, real estate, and energy sectors noted increasing employment levels, while those in the auto sales, restaurant, and tourism sectors reported a decline. Employee hours declined modestly in the health services and restaurant sectors, but were steady-to-increasing for all other reporting industries. Employment levels and employee hours were expected to rise modestly in the months ahead.
The majority of respondents noted labor shortages for both entry-level and skilled positions, including shortages for retail sales, kitchen staff, specialized IT, commercial drivers and skilled mechanics. Wage growth accelerated since the previous survey, with wages rising moderately in most sectors and strong growth anticipated in the coming months.
Input prices were moderately higher in September and early October, and selling prices rose modestly. In the retail sector, input and selling prices increased robustly compared to both the previous survey period and year-ago levels, and expectations were for similar gains in the months ahead. Restaurant contacts noted slight gains in selling and input prices since the previous survey period, but both were strongly above year-ago levels. Input prices rose strongly in the transportation sector, while selling prices increased modestly. Manufacturers reported modest price growth for finished products and moderately higher prices for raw materials. Most manufacturing contacts continued to note that recent trade developments had led to higher input prices. Respondents in the restaurant, transportation, and manufacturing sectors expected moderate growth in selling and input prices in the months ahead.
Consumer spending rose moderately, led by gains in retail sales, and contacts expected slight increases in the coming months. Retail sales expanded robustly compared to the previous survey period, and contacts anticipated sales to grow at a modest pace in the months ahead. Respondents noted household furniture sold well, while higher-priced items sold poorly. Auto sales continued to grow modestly, and contacts expected both sales and inventories to rise moderately in the coming months. Restaurant sales fell modestly compared to the previous survey period, but remained well above year-ago levels. Restaurant contacts anticipated sales to decline slightly in the next few months. Tourism sales increased slightly, however contacts projected a slight decline in the months ahead.
Manufacturing and Other Business Activity
Manufacturing activity continued to expand at a moderate pace, and other business contacts experienced strong sales growth. Factory activity grew at durable goods plants due to increases in nonmetallic minerals, metals, and electronics, while nondurable plant activity slowed slightly. The level of production, shipments, and new orders increased slightly over the survey period, and each remained higher than year-ago levels. Manufacturers expected moderate increases in capital expenditures in the coming months. Many manufacturing respondents noted savings due to federal tax cuts, but a majority of respondents also noted negative impacts from tariffs, primarily due to higher input prices.
Outside of manufacturing, firms in the wholesale trade, transportation, and professional and high-tech sectors reported strong sales with expectations for continued growth in the months ahead. Professional and high-tech firms anticipated capital expenditures to increase slightly moving forward, while wholesale trade firms expected capital spending to decrease slightly. Transportation contacts expected a modest increase in capital spending in the coming months, with some contacts attributing this increase to recent federal tax cuts.
Real Estate and Construction
Overall District real estate activity remained mixed as residential real estate activity declined modestly while commercial real estate activity rose modestly. Residential home sales continued to fall moderately, and selling prices and inventories of unsold homes grew modestly. Respondents expected additional decreases in residential sales moving forward, citing seasonal factors and rising interest rates. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential construction activity strengthened slightly since the previous survey period, and construction supply contacts expected sales to expand further in the months ahead. Activity in the commercial real estate sector continued to increase at a modest pace as sales, absorption, completions, and prices rose. However, a majority of respondents reported higher commercial vacancy rates for the first time since the end of 2016.
Bankers reported a modest increase in overall loan demand in September and early October. Respondents reported a modest increase for commercial and industrial loans and a slight increase for commercial real estate and agricultural loans. Bankers indicated a slight decrease for consumer installment loans, while the volume of residential real estate loans remained steady. Loan quality improved modestly compared to a year ago, and respondents expected loan quality to improve slightly over the next six months. Credit standards remained largely unchanged in all major loan categories. Overall, bankers reported a slight increase in deposit levels.
District energy activity accelerated since the last survey period, and contacts expected additional growth moving forward. The number of active oil rigs increased slightly, while the number of active gas rigs inched down. Oil prices rose, recovering somewhat after a slight dip last month. The majority of contacts have not been affected by price differentials between WTI Midland and Cushing, although some contacts noted a slight negative impact on oil production. Despite a glut of natural gas, contacts did not expect production to slow given the construction of additional pipelines which should increase future supply capacity. Increased U.S. exports of liquefied natural gas was viewed positively by a majority of respondents.
The farm economy in the Tenth District remained weak as expectations of increased production contributed to a slight decline in corn and soybean prices since the previous reporting period. Corn and soybean production was expected to be strong in Nebraska, which could offset some adverse effects of low prices. Crop yields in Missouri, however, weakened considerably from a year ago and could further strain farm income. The price of wheat was down slightly from the previous reporting period, but remained higher than a year ago. In the livestock sector, the price of cattle increased slightly from the previous period, but remained lower than a year ago as inventories generally remained high. In contrast to the prices of other agricultural commodities in the District, hog prices increased sharply in September due to expectations of lower production and higher exports.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy