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Beige Book Report: Kansas City
September 2, 2020
Summary of Economic Activity
Tenth District economic activity continued to strengthen in July and August. Overall, the economy expanded moderately, but activity in many sectors still remained below pre-pandemic levels. Consumer spending increased moderately as all subsectors reported improvement. In the months ahead, retail and auto contacts expected growth to continue, while tourism and restaurant contacts were more pessimistic. Manufacturing activity picked up, with both non-durable and durable goods producers reporting higher levels of production and new orders. Durable goods activity remained well below year-ago levels, but additional gains were expected in the next few months. Sales also picked up in the transportation, wholesale trade, and professional and high-tech sectors, and moderate growth was anticipated in coming months. Residential real estate activity continued to increase at a moderate pace, but commercial real estate conditions worsened further. Energy activity held relatively steady, but rig counts remained well below year-ago levels. The agriculture sector remained weak, and the deterioration in farm income accelerated. District employment rebounded further in July and August, but was still moderately below year-ago levels. Wages rose slightly, while overall input and selling prices increased at a modest pace.
Employment and Wages
District employment increased modestly since the last survey period but remained moderately below year-ago levels. The biggest gains were in real estate, transportation and tourism sectors, but despite these gains, tourism and transportation employment was still well below a year ago. Manufacturing, wholesale trade, and professional and high-tech employment rose modestly for the first time since declining this spring. Overall employment expectations improved in August, with manufacturers expecting moderate gains and services contacts expecting slight gains in the months ahead.
Respondents were split regarding labor shortages, with many reporting a need for truck drivers, mechanics, and restaurant workers. Wages rose slightly, and modest gains were expected in the coming months.
Input and selling prices rose modestly in July and August and were expected to continue to do so in the next few months. Prices for raw materials and finished products in the manufacturing sector increased modestly, and expectations were for similar gains in the coming months. Transportation input prices rose moderately and selling prices increased slightly, but were still modestly below year-ago levels. Construction supply respondents noted a moderate increase in selling prices since the last survey and expected prices to continue to increase in the months ahead. Retail input prices increased moderately, while selling prices rose at a slightly slower pace. Restaurant input and selling prices continued to increase significantly, but the pace of increases moderated compared to the previous survey. Restaurant prices were above year-ago levels and were expected to continue to rise in the coming months.
Consumer spending increased moderately since the last survey period but remained modestly below year-ago levels. Sales rose for auto, retail, restaurant, and tourism, with retail sales moderately above a year ago, driven by strong grocery and home improvement sales over the past few months. While restaurant and tourism activity showed a moderate rise compared to the last survey, activity was still strongly below year-ago levels. More than half of retail, restaurant, auto, and tourism contacts reported that stimulus funds had a major positive effect on their businesses in recent months. Expectations were mixed. Contacts in the health services, retail, and auto sectors predicted moderate gains in the months ahead, while restaurant and tourism contacts anticipated declines.
Manufacturing and Other Business Activity
Manufacturing activity expanded for the second consecutive survey period, and strengthened in August to a moderate pace of growth. Gains in the non-durable goods sector outpaced those in the durables goods sector, but contacts in both sectors noted positive growth. Production and new orders increased robustly in the non-durable goods sector, leading to overall activity levels that were slightly above a year ago. Production and new orders rose modestly in the durable goods sector, but activity remained moderately down from year-ago levels. Many respondents indicated that if government support were to diminish in the next six months, more furloughs or layoffs would be needed. Expectations rose moderately regarding production and new orders, but capital expenditures were expected to remain roughly flat.
Outside of manufacturing, sales in the transportation and wholesale sectors increased moderately compared to the last survey. Sales in professional and high-tech services showed modest improvement but remained moderately below year-ago levels. Contacts in wholesale trade, transportation, and professional and high-tech services sectors expected moderate increases in sales in the coming months. Expectations for capital expenditures were mixed across sectors.
Real Estate and Construction
Residential real estate conditions picked up moderately in July and August, while commercial real estate showed continued declines. Residential real estate experienced moderate increases in home sales and prices, with all respondents reporting stronger activity than a year ago. Construction supply sales continued to increase slightly, and expectations for future sales rose for the first time following declines in the spring. Home inventories decreased moderately and remained low, but contacts expected residential real estate activity to expand further in the coming months. Commercial real estate conditions continued to worsen as absorption rates, prices, rents, and sales fell since the previous survey period and remained moderately below year-ago levels. Commercial construction declined modestly, and contacts indicated that the slowdown in commercial construction may be accelerating. Additionally, access to credit remained difficult, and more respondents indicated higher vacancy rates. Commercial real estate contacts anticipated conditions to worsen in the next few months.
Since the last survey, bankers reported a slight increase in overall loan demand. Increases were concentrated in two categories, with strong increases in residential real estate loan demand and slight increases in consumer installment loan demand. Respondents indicated loan demand for commercial real estate held steady, while demand for agricultural loans declined modestly and commercial and industrial loans fell moderately. Credit standards tightened in all categories, with a modest tightening in commercial real estate and commercial and industrial loans and slight tightening in residential real estate, consumer installment, and agricultural loans. In comparison to a year ago, loan quality decreased somewhat, and bankers expected loan quality to continue decreasing over the next six months. Deposit levels rose at a moderate pace since the last survey.
District energy activity held relatively steady since the previous survey period, but was much lower than levels of activity in August 2019. Revenues and employment continued to decline, but the number of active oil and gas rigs in the District was mostly unchanged. Rig levels remained significantly below year-ago levels. Firms shut-in wells earlier this year, and indicated no immediate plans to bring more production capacity back online until the oversupply of oil and gas wanes and prices increase. Despite most regional energy firms taking advantage of the SBA PPP loan program, expectations for future drilling and business activity remained subdued. Continued uncertainty was a key factor inhibiting future capital expenditures.
Weak conditions in the Tenth District agricultural economy persisted, and farm income deteriorated further. The effects of the COVID-19 pandemic continued to constrain prices of key agricultural commodities, and profit opportunities remained limited. Prices for major crops and livestock increased slightly from the prior reporting period, but remained below pre-pandemic levels. Drought in the western portion of the District could further reduce revenues for some producers. Dry conditions were most prevalent in Colorado, where nearly 30 percent of corn acres had poor or very poor quality through mid-August. Alongside lower revenues, farm income across all states in the District declined at a noticeably faster pace than the prior survey period.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy