Beige Book Report: Kansas City
April 15, 2020
Summary of Economic Activity
After holding fairly steady in the first half of March, Tenth District economic activity deteriorated sharply later in the month as the spread of COVID-19 negatively impacted consumer spending and business activity. Most contacts expected additional declines in the months ahead. Consumer spending slowed significantly since the previous survey, with markedly lower sales in the auto, restaurant and tourism sectors. After some stabilization earlier this year, manufacturing activity contracted sharply in March and expectations fell to levels last seen in early 2009. Transportation and wholesale trade contacts reported an increase in sales, but anticipated sharply lower sales in the next few months. Professional and high-tech sales declined slightly and were anticipated to fall further. Residential real estate conditions continued to hold fairly steady, but commercial real estate conditions worsened moderately. The decline in energy activity accelerated in the District as oil prices fell further below profitable levels. The agriculture sector weakened as cattle and corn prices fell sharply and credit conditions worsened. District employment fell slightly in March, but layoffs and furloughs increased significantly over the past two weeks suggesting worsening employment levels in the months ahead. Selling prices declined slightly in both the services and manufacturing sectors and additional declines were anticipated.
Employment and Wages
District employment was down slightly in March, while employee hours declined modestly. However, employment conditions deteriorated significantly throughout the month, including a dramatic rise in unemployment insurance claims in the final week of the month, and contacts expected additional declines in employment and employee hours in the months ahead. Respondents in all sectors reported lower employment levels except for retail trade and real estate which noted modest job gains. Similarly, retail trade and real estate, along with health services were the only sectors with employment above year-ago levels.
For the first time in several years, a majority of contacts did not report labor shortages. Many respondents noted uncertainty surrounding the spread of COVID-19, leading them to layoff or furlough workers and to implement hiring freezes. A majority of respondents reported that they did not have to raise wages more than normal to attract or keep any types of workers. Overall wages rose slightly, but declines were expected in the months ahead.
Prices
Input prices rose modestly and selling prices declined slightly in the services sector, while both input and selling prices fell slightly in the manufacturing sector. Contacts in both the manufacturing and services sectors expected prices to decline in the months ahead. Respondents in the retail trade sector noted strong growth in both input and selling prices since the previous survey period. Contacts in the restaurant sector noted a slight increase in input prices, while selling prices edged down. In the transportation industry, input prices fell moderately and selling prices declined slightly. Selling prices held steady for construction supplies after rising in the previous survey period. Manufacturers reported slightly lower prices for both finished products and raw materials prices, and anticipated modest declines in the next few months.
Consumer Spending
Consumer spending decreased significantly since the previous survey as regional businesses were negatively affected by COVID-19. While some retailers, like grocers and pharmacies reported increased sales, sales were markedly lower for the auto, restaurant and tourism sectors. Although some health services experienced higher levels of activity, most healthcare services firms reported slower sales and a decline in employment levels due to the decrease in elective procedures. Auto sales were down substantially compared with a year ago, and inventories were expected to rise. Restaurant sales were significantly lower compared with the previous survey period. Tourism sales fell sharply in March and were well below year-ago levels. Over half of contacts expected lower levels of employment in 2020 due to COVID-19 and recent market volatility, and an even greater share of firms were concerned about cash availability.
Manufacturing and Other Business Activity
Manufacturing activity contracted sharply in March, with declines in both durable and nondurable goods plants. Production, new orders, employment, and raw materials inventories all decreased compared to the previous survey period and fell below year-ago levels. Around 60 percent of manufacturers faced delayed payments from customers, and 54 percent had concerns about cash availability. Expectations for future activity fell to levels last seen in early 2009, and contacts reported putting capital investments on hold.
Outside of manufacturing, firms in the transportation sector experienced slightly higher sales, though sales were still below year-ago levels. Sales increased moderately for wholesale trade and remained above year-ago levels. However, sales declined slightly for professional and high-tech services sectors compared to the previous survey period and were down from a year-ago. Contacts in the transportation and wholesale trade sectors anticipated significantly lower sales in the coming months, and expectations for the professional and high-tech services sector were also negative.
Real Estate and Construction
Residential real estate activity generally held steady in March, while commercial real estate conditions deteriorated moderately. Residential sales and inventories were flat compared to the previous survey despite a typical seasonal pickup, and were below year-ago levels. Home prices edged up. However, sales, starts, traffic of potential buyers, and prices were expected to decline in the coming months. Commercial real estate activity decreased moderately in March. Vacancy rates increased, while absorption, completions, construction underway and sales declined. Several contacts also reported that access to credit had become more difficult. Over the next few months, commercial real estate activity was expected to deteriorate further.
Banking
District loan demand declined modestly in recent weeks, with decreases in commercial real estate loans, commercial and industrial loans, and consumer installment loans. Loan demand rose modestly for residential real estate, while agriculture loan demand remained steady. Many bankers reported tightening of credit standards, primarily confined to commercial real estate and commercial and industrial loans. Loan quality was modestly below a year ago, but was expected to deteriorate sharply in the next six months. Cash withdrawals increased, and bankers have been able to meet that demand. Overall, bankers had a guarded outlook as they kept a close watch on virus developments and moved toward a more risk-averse position. Many banks have moved to remote work arrangements, and were limiting most customer interactions to drive-through service.
Energy
District energy activity decreased at a faster pace compared with the previous survey period. Expectations for future drilling and business activity worsened, with many firms not expecting rig counts or employment levels to pick up in the near term. Revenues and profit levels declined significantly, and most firms decreased their plans for capital expenditures or put them on hold. The number of active oil and gas rigs in the District fell further. The sharp drop in commodity prices from the Saudi-Russia supply shock increase coupled with the decrease in demand due to the global COVID-19 pandemic has weakened the outlook for energy activity. March 2020 price levels were not profitable for District contacts and if oil prices remained below $40, respondents expected only 60-65 percent of firms to remain solvent in the next year.
Agriculture
Agricultural economic conditions weakened in March. Macroeconomic developments related to COVID-19 were expected to put downward pressure on prices for many agricultural commodities, despite sharp increases in short-term demand for retail food products. Cattle prices declined rapidly in mid-March which reduced profit opportunities for producers. Corn prices also decreased sharply as demand declined alongside a substantial drop in ethanol production. Credit conditions weakened modestly from the prior survey period, and while many farm lenders cited uncertainty about the extent of the impact, most expected conditions to deteriorate further in coming months. Contacts connected to food processing and retailing reported supply chains have been well maintained despite rapid increases in demand.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy