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Kansas City: January 2021

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Beige Book Report: Kansas City

January 14, 2021

Summary of Economic Activity
The Tenth District economy held fairly steady in December, on net, albeit with large variation across sectors. However, contacts in almost every sector expected conditions to improve over the next six months. Consumer spending continued to decline due to further drops in auto, restaurant and tourism sales. But retail sales rebounded sharply in December and were above year-ago levels. Manufacturing production and new orders expanded modestly, driven by moderate gains at durable goods plants. Sales rose slightly among professional and high-tech firms, but transportation and wholesale trade contacts reported declines. Residential real estate activity slowed as home sales declined amid falling inventories and rising prices. Commercial real estate conditions continued to deteriorate, but contacts expected vacancy rates to edge down and prices to stabilize in coming months. Energy activity expanded as revenues, profits and drilling rose for most firms. The agricultural sector improved modestly as higher crop prices lifted prospects for farm incomes. Employment levels increased slightly, and wages rose modestly. Input prices continued rise faster than selling prices, leading to tighter profit margins.

Employment and Wages
District employment increased slightly in December, but remained slightly below year-ago levels. Within the services sector, gains were driven by retail and wholesale trade, while growth was restrained by the restaurant and tourism industries. Expectations within the services sector were mostly positive aside from the transportation, restaurant, and health services sectors. Manufacturers noted increases in both employment levels and employee hours and expected modest growth in the coming months.

The majority of contacts in the services sector reported labor shortages, noting a need for truck drivers, specialized information technology workers, and mechanics. One hospital noted being short on staff to care for COVID patients such as registered nurses, respiratory therapists, and certified nursing assistants. Wages rose modestly during the survey period and were expected to rise at a faster pace in the coming months. Services contacts reported that 23 percent of employees were working remotely on average, while the average among manufacturers was 9 percent.

Growth in input prices continued to outpace that of selling prices in the services and manufacturing sectors, although more notably for the latter. Within manufacturing, prices for raw materials rose moderately while prices received for finished products grew slightly. Additionally, prices for raw materials were expected to continue to outpace selling prices in the coming months, putting pressure on profit margins. Retail prices increased moderately, with input prices rising slightly faster than selling prices. In contrast, contacts from the transportation and restaurant sectors indicated that selling prices rose faster than input prices in December, but expected that trend to reverse in upcoming months. Contacts in construction supply noted that selling prices rose modestly and expected them to continue to do so in following months.

Consumer Spending
Overall consumer spending declined in December despite a robust increase in retail sales. Declines in restaurant, auto, and tourism sales accelerated, while activity in the health services sector also fell following moderate gains during the previous survey period. Retail trade was the only bright spot, with strong sales growth during December and sales above year-ago levels. Auto and restaurant sales were modestly below year-ago levels, while tourism activity remained sharply lower. Respondents from all consumer sectors expected modest gains in the next few months. While the majority of contacts indicated that the most recent surge of COVID cases negatively affected their firm's business, a quarter of respondents indicated that it had had no effect.

Manufacturing and Other Business Activity
Manufacturing activity expanded modestly since the last survey, but remained modestly below year-ago levels. Production and new orders rose moderately for durable goods, while activity for non-durables fell slightly for the first time since late spring. Contacts in both sectors expected production and new orders to rise in coming months. Capital expenditures were just below year-ago levels. Looking ahead, firms' primary motivations for capital outlays in the upcoming year were to make investments in labor saving technology and equipment to enhance production capacity.

Outside of manufacturing, sales in transportation and wholesale trade fell, leaving sales modestly below year-ago levels. Sales in professional and high-tech services rose slightly, but remained moderately below year-ago levels. Capital expenditures edged down in transportation and professional and high-tech services but increased modestly for wholesale trade. Contacts from these three sectors anticipated both sales and capital expenditures to rise over the next few months.

Real Estate and Construction
Residential real estate activity slowed moderately in December, while commercial real estate conditions continued to worsen modestly. Residential sales fell moderately as inventories of homes fell further and prices continued to rise. Despite this, home sales remained above year-ago levels and contacts anticipated moderate increases in sales and prices the coming months. Construction supply sales fell for the first time since February and were expected to continue to fall modestly moving forward. Commercial real estate contacts noted modest declines in absorption rates, sales, prices, and rents along with an increase in vacancy rates. Developers reported that credit was increasingly difficult to access. Commercial construction, however, edged up and additional increases were expected in the next few months. Additionally, contacts expected vacancy rates to edge down and prices to stabilize.

Banking contacts reported a slight increase in total loan demand in recent weeks. Growth was concentrated in two categories, with a modest increase in the demand for residential real estate loans and a slight increase in the demand for commercial real estate loans. Loan demand in all other lending categories slowed, with a slight decline in consumer loan demand, a modest decline in commercial and industrial loan demand, and a moderate decline in agricultural loan demand. Credit standards tightened slightly for residential real estate and commercial and industrial loans, and tightened modestly for commercial real estate loans. Overall loan quality improved slightly compared to a year ago, although bankers expected loan quality to decline modestly over the next six months in several categories including commercial real estate, hospitality and small business. Deposit levels increased robustly in recent weeks. Anecdotal evidence suggested the economy outperformed expectations this year, but there remained a general uncertainty around future performance. One banker commented, "surprised how well our year turned out. Economy seems very fragile yet continues to perform surprisingly well".

District energy activity expanded since the previous survey period but continued to lag year-ago levels. Revenues, profits, and drilling activity rose for most firms but remained below year-ago levels. However, employment levels continued to decline. The number of active oil and natural gas rigs increased broadly across District states. While commodity prices increased since the last survey period, regional firms also reported needing a higher average price for a substantial increase in drilling to occur for oil and natural gas. Most contacts expected higher regulatory costs for their firm in the upcoming year, and a significant share of firms indicated plans to reduce emissions or reuse water. Expectations for future drilling and business activity turned positive for the first time since the first quarter of 2020, but firms anticipated additional job cuts moving forward due to continued consolidation and efficiency gains.

Conditions in the Tenth District agricultural economy and prospects for farm income improved modestly since the previous reporting period alongside further increases in crop prices. District contacts reported that direct government payments had provided robust support for farm incomes, and expected the sharp increase in crop prices during recent months to further improve profits. Since the previous period, crop prices increased moderately and were well above a year ago. In addition to higher prices, strong crop yields in some parts of the District boosted revenues further, particularly in Missouri. Profit opportunities for livestock producers in the District were more limited. Cattle prices were generally stable, but remained well below a year ago. Hog prices declined slightly in the period, but were slightly higher than a year ago.

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