Beige Book Report: Kansas City
December 2, 2020
Summary of Economic Activity
The Tenth District economy continued to expand slightly in October and November, although activity remained below pre-pandemic levels in several sectors. After rising in October, consumer spending fell slightly in November due to a pullback in retail, restaurant, auto and tourism sales. However, contacts expected sales in all consumer segments to rebound in the months ahead. Manufacturing production and new orders expanded modestly, and capital expenditures were expected to rise at both non-durable and durable goods plants. Transportation and wholesale trade sales picked up moderately, and sales rose modestly in the professional and high-tech sector. Home sales and prices increased and were well above year-ago levels even as inventories fell further. Commercial real estate conditions worsened modestly, and additional declines were expected in the months ahead. Energy activity held steady, and the farm economy improved moderately as agricultural commodity prices increased. Employment rose slightly, but remained modestly below year-ago levels. Wages continued to rise, and modest gains were anticipated in the next few months. Input prices rose at a faster pace than selling prices, and most industries expected additional price gains moving forward.
Employment and Wages
District employment increased slightly during the survey period, but remained modestly below year-ago levels. Growth was driven by increases in health services and retail employment, but was held back by moderate declines in the restaurant and tourism sectors. Manufacturing contacts noted a slight increase in employment, and contacts expected additional gains in the coming months. Employment expectations within the services sector were mixed, with the biggest gains expected in retail and wholesale trade and the biggest losses expected in auto and professional and high-tech services.
A majority of contacts in the services sector reported labor shortages, indicating a need for truck drivers and retail, restaurant, and technology staff. Wages rose modestly in October, followed by smaller gains in November, leaving wages modestly above year-ago levels. Modest wage increases were expected moving forward. Over the next year, most firms expected employment to increase or remain unchanged, although a lesser number still expected declines. Contacts cited expected sales growth and the need to expand the current skillset of employees as the primary reasons for hiring.
Prices
Input prices rose moderately, outpacing modest gains in selling prices in both the services and manufacturing sectors. Contacts in the retail and restaurant sectors indicated that growth in selling prices was expected to accelerate in the coming months. Prices for raw materials and finished products in the manufacturing sector followed a similar pattern, but although selling prices were expected to grow more quickly moving forward, raw materials prices were still expected to rise at a faster pace. Transportation input prices rose moderately in October but edged down in November, while selling prices rose modestly. Transportation contacts expected moderate gains in the coming months. Construction supply contacts indicated that selling prices grew moderately, but expected them to fall in the winter months.
Consumer Spending
Consumer spending increased slightly in October, but decreased slightly in November. Moderate gains in retail and health services drove the rise in October. However, a slight decline in retail sales combined with modest decreases in restaurant and auto sales and moderate declines in tourism led to an overall decline in November sales activity, despite an increased pace of sales in health services. Despite the drop in retail sales in November, activity remained moderately above year-ago levels. However, tourism and restaurant sales remained well below year-ago levels. In November, respondents from all sectors expected positive growth in the months ahead, with tourism and restaurant sectors expecting modest gains for the first time since spring. The majority of firms indicated that developments related to COVID have pushed their firm to either expand, implement for the first time, or create a plan to implement an online business segment.
Manufacturing and Other Business Activity
Manufacturing activity expanded modestly since the previous survey, but still remained modestly below year-ago levels. Production and new orders increased modestly for both durable and non-durable goods, but durable goods activity remained moderately below year-ago levels. By contrast, nondurables contacts indicated that production was slightly above year-ago levels for the first time since February. Expectations were positive as contacts in the durables and non-durables sectors expected modest and moderate gains, respectively. Capital expenditures were expected to increase modestly in both sectors. Many contacts indicated that the uncertainty surrounding the pandemic and related business restrictions/ policies was restraining hiring plans.
Outside of manufacturing, sales in transportation and wholesale trade increased moderately, and sales and capital expenditures in professional and high-tech services rose modestly. For the latter, this marked an improvement from declines in late summer. Contacts in transportation and wholesale trade expected moderate gains, while those in professional and high-tech services anticipated modest declines.
Real Estate and Construction
Residential real estate activity increased moderately, while commercial real estate conditions continued to worsen at a modest pace. Despite additional declines in home inventories, sales increased modestly, leading to moderate gains in home prices. Home sales and prices were strongly above year-ago levels, and this trend was expected to continue in the coming months. Construction supply sales continued to rise modestly, but were expected to decline heading into the winter months. Commercial real estate conditions worsened, as vacancy rates rose, developers had difficulty accessing credit, and there were slight decreases in absorption rates, sales, prices, and construction. Commercial rents edged down in October but were unchanged in November, the first month without a decline since February. Contacts indicated that rents were expected to hold steady moving forward, although overall commercial real estate conditions were expected to worsen modestly.
Banking
In recent weeks, bankers reported a slight increase in overall loan demand. Gains were driven by moderate increases in residential real estate loan demand and slight increases in commercial real estate loan demand. Consumer installment loan demand held steady, agricultural loan demand decreased slightly, and commercial and industrial loan demand fell modestly. Credit standards tightened slightly for residential real estate, commercial real estate, and commercial and industrial loans. Loan portfolio quality decreased slightly in comparison to a year ago, but bankers expected significant decreases in loan quality over the next six months. Despite this, deposit levels remained strong. Overall, bankers were somewhat concerned with the continued stress on the economy due to the pandemic, although specific sectors, including residential real estate, remained strong.
Energy
District energy activity was relatively unchanged from the previous survey period, with revenues and drilling activity mixed across individual firms. Debt increases and bankruptcies continued for several regional firms, while other contacts reported positive net income and capital expenditure plans. Firms expected additional mergers and acquisitions moving forward. Many contacts reported additional efficiency gains and continued investment in innovations to lower operating costs. The number of active oil and gas rigs in the District increased slightly in October and November, due to gains in New Mexico and Oklahoma. However, the number of active rigs remained below year-ago levels. Oil prices held relatively steady, and natural gas prices rose. However, prices for oil and gas remained below the average price District firms reported needing for drilling to be profitable.
Agriculture
The Tenth District farm economy improved moderately since the previous period alongside additional increases in agricultural commodity prices. Since early October, strengthening demand and downward revisions to production estimates led to sharp increases in corn and soybean prices and moderate increases in most other agricultural prices. Stronger profit opportunities than earlier in the year, in addition to substantial government payments to producers, supported farm sector finances. Although farm income generally remained low in aggregate, contacts reported lower rates of problem loans compared to a year ago. District contacts continued to express concerns, however, about the potential for renewed pressure in the months ahead, depending on the path of agricultural commodity prices, government support programs, and drought in some parts of the region.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy