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Kansas City: March 2021

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Beige Book Report: Kansas City

March 3, 2021

Summary of Economic Activity
The Tenth District economy expanded slightly in January and February, with conditions strengthening in most sectors. Contacts in almost every sector anticipated stronger activity in the months ahead, although the majority also noted that the COVID-19 vaccine rollout was somewhat or very important to their outlook. Consumer spending increased slightly in January—driven by gains in retail, restaurant, and healthcare spending—but fell in February. Manufacturing production and new orders expanded modestly, with gains at both durable and nondurable plants. Contacts reported modest gains in professional and high-tech sales and moderate gains in wholesale trade sales. Residential real estate activity rebounded after slowing in December, and commercial real estate conditions showed signs of stabilizing, albeit at levels below a year ago. Energy activity edged higher amid stronger commodity prices and demand for natural gas. Agricultural conditions also strengthened, with the majority of contacts indicating that farm income had moved above year-ago levels. Employment continued to expand slightly, and wages rose modestly. Input prices continued to rise faster than selling prices, and a large majority of firms reported being negatively affected by higher materials prices or a lack of available materials.

Employment and Wages
District employment continued to increase at a slight pace but remained slightly below year-ago levels. Overall employment growth in the services sector was driven by moderate gains in retail and wholesale trade, while employment fell slightly in the transportation, tourism and restaurant sectors. Looking ahead, contacts from all service industries expected employment to remain unchanged or to increase in the coming months. Manufacturers noted slight increases in employment levels and hours and expected similar gains in the next few months.

The majority of contacts reported labor shortages, with strong demand for technicians, truck drivers, and information technology professionals. More generally, contacts reported severe shortages for skilled hourly workers and notable shortages for unskilled hourly positions. Wages rose modestly since the last survey, and contacts expected wages to rise at a slightly faster pace in the coming months. Although the majority of firms expected vaccinations to affect their business outlook, less than one-third of firms anticipated that the COVID-19 vaccine rollout would impact their hiring plans this year.

Input prices in both the services and manufacturing sectors continued to rise at a faster pace than selling prices. More than 80 percent of manufacturing firms and 60 percent of services firms reported being negatively affected by the rise in materials prices or the lack of availability. Prices of raw materials for manufactured goods rose moderately over the survey period, while selling prices increased modestly. Selling prices also increased modestly in the services sector, with slightly faster growth for input prices. Construction supply contacts noted a moderate increase in selling prices, and they expected prices to increase at a slightly faster pace in the next few months. Manufacturing and services contacts expected both input and selling prices to rise in the months ahead and anticipated that stronger input price growth would continue to put pressure on profit margins.

Consumer Spending
Overall consumer spending increased slightly in January but declined modestly in February. Sales rose moderately in retail, restaurant, and health services sectors in January as additional stimulus payments were distributed, but then declined in February. Restaurant sales remained modestly below year-ago levels as the pandemic continued to suppress in-person dining. Sales in the auto and tourism industries fell moderately in January, but tourism sales rose slightly in February. Contacts expected moderate gains over the next few months in the retail, health services, and tourism industries, while auto sales were expected to pick-up modestly. Restaurant contacts expected sales to remain roughly flat in the coming months. A large majority of contacts indicated that widespread COVID-19 vaccination was somewhat or very important to their firm's overall business outlook.

Manufacturing and Other Business Activity
Manufacturing activity expanded modestly since the previous survey, and activity levels rose slightly above year-ago levels. Production and new orders increased modestly for durables and slightly for nondurables. Capital expenditures rose for both durable and nondurable goods to a level slightly above a year ago. Durable and nondurable manufacturing activity was expected to increase moderately in the next few months, but the vast majority of manufacturing firms indicated that widespread COVID-19 vaccination was somewhat or very important to their firm's overall business outlook.

Outside of manufacturing, sales rose modestly in professional and high-tech services and moderately in the wholesale trade sector. Transportation sales rose slightly in January but contracted in February. Contacts noted that sales remained below year-ago levels within the transportation and professional and high-tech services sectors, but wholesale trade sales were moderately higher than a year ago. Capital expenditures rose modestly in the transportation and wholesale trade sectors but edged lower in professional and high-tech services. Respondents from all industries expected sales to increase modestly in the coming months.

Real Estate and Construction
Residential real estate activity expanded moderately, while the deterioration in commercial real estate conditions stabilized somewhat. All residential real estate contacts reported an increase in home prices and the majority indicated a decrease in inventories. Home sales also increased modestly, following a moderate decline during the previous survey period. Home sales were expected to rise further in the coming months despite low inventories and higher prices. Commercial vacancy rates decreased for the first time in over a year, and absorption rates remained flat. In addition, commercial construction activity increased slightly. However, sales, prices, and rents fell modestly, and developers' access to credit became modestly more difficult. Overall, commercial real estate conditions remained worse than a year ago. Expectations for further declines in vacancy rates and increases in absorption and construction pointed to a gradual improvement in the commercial real estate sector over the next few months.

District bankers reported modest growth in loan demand in January and February, driven by increased demand for residential and commercial real estate loans. However, demand fell for agricultural, consumer, and commercial and industrial loans. In the past few weeks, many banking respondents indicated that interest rates charged on new commercial and industrial loans moved moderately lower. Overall credit standards generally remained stable, although standards tightened slightly for commercial and residential real estate and for agricultural lending. Consumer loan standards eased slightly. Bankers reported a slight increase in loan quality compared to a year ago and expected similar quality over the next six months. Deposit levels continued to expand robustly.

District energy activity edged higher since the previous survey period but continued to slightly lag year-ago levels. Revenues and profits varied by firm, while employment levels continued to decline. The number of active oil and natural gas rigs was flat across the District overall, with a slight uptick in active oil rigs in Colorado. Oil and natural gas stocks eased somewhat lower in early 2021 after expanding in 2020. Commodity prices rose further since the last survey period, due in part to stronger demand for natural gas across the District and country. Moving forward, regional firms indicated that the changing regulatory landscape may impact business activity and profitability in the future. Expectations for future drilling and business activity were generally positive though as District firms anticipated widespread vaccination rollouts to boost mobility and transportation activity in the coming year.

The Tenth District farm economy strengthened alongside a sharp rebound in farm income and agricultural credit conditions. In the most recent survey period, a majority of District contacts indicated that farm income was higher than a year ago for the first time since 2013, leading to increased loan repayments and slight increases in farm real estate values. Crop prices rose modestly since January and remained considerably higher than a year ago. Contacts located in regions more dependent on livestock revenues and exposed to severe drought, however, were less optimistic. Although cattle prices also increased modestly since January, they remained lower than a year ago, and higher crop prices could lead to higher feeding costs for livestock producers in the coming months.

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