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Kansas City: April 2021

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Beige Book Report: Kansas City

April 14, 2021

Summary of Economic Activity
Growth in the Tenth District economy accelerated in March, with most sectors expanding at a moderate pace. Consumer spending increased moderately as retail, restaurant, auto, and tourism sales rose. A quarter of consumer spending contacts reported that the pace of vaccinations had boosted demand, and sales were expected to rise further in the coming months. Manufacturing activity also expanded moderately, and new orders rose above year-ago levels for both durable and non-durable goods. Contacts reported moderate gains in wholesale trade, transportation, and professional and high-tech sales, with additional gains anticipated in the months ahead. Home prices rose further as inventories declined and sales increased. Commercial real estate conditions held steady as vacancy rates edged down and absorption rates increased slightly. Energy activity increased moderately, with most District firms reporting higher revenues and profits. Agricultural conditions remained favorable, supported by strong crop prices. Employment and wages rose at a modest pace. Input prices continued to rise faster than selling prices, but more than half of firms experiencing price pressures indicated that they were able to pass through a majority or all of their cost increases onto customers.

Employment and Wages
District employment growth accelerated in March, with jobs added at a modest pace in both the services and manufacturing sectors. Recent gains pushed manufacturing employment above year-ago levels, but employment in the services sector remained slightly lower. Services sector gains were driven by the retail, tourism, and restaurant sectors, while employment in auto sales and health services edged down. Despite recent gains, employment in the tourism, restaurant, and transportation sectors remained moderately below year-ago levels. Overall, contacts in both the services and manufacturing sectors expected modest increases in employment in the coming months.

The majority of contacts reported labor shortages, with strong demand for truck drivers, information technology staff, and skilled technicians. Wages rose modestly, and additional modest gains were anticipated in the months ahead. The majority of firms indicated that the passage of the most recent fiscal stimulus package had no effect on their hiring plans for the rest of 2021.

Input prices continued to rise at a faster pace than selling prices in both the services and manufacturing sectors, putting additional pressure on profit margins. However, among firms experiencing price pressures, more than half indicated that they were able to pass a majority or all of their cost increases through to customers. Overall, input prices increased robustly, while selling prices rose moderately in both the manufacturing and services sectors. Contacts expected similar trends in the months ahead, with slightly faster increases in selling prices. Construction supply selling prices also increased moderately and were expected to continue at this pace in the coming months.

Consumer Spending
Consumer spending increased moderately in March, with a quarter of survey contacts indicating that the pace of vaccinations and the trajectory of the pandemic led to stronger demand for their product or service. Sales in the restaurant, retail, and auto sectors increased moderately, and tourism sales were well above their levels earlier this year. Despite recent gains, tourism and restaurant sales remained moderately below pre-pandemic levels. However, retail sales moved modestly above year-ago levels, and auto sales rose above year-ago levels for the first time since early last summer. Sales in health services fell moderately and were even with year-ago levels. Contacts across all sectors expected a moderate rise in sales in the upcoming months.

Manufacturing and Other Business Activity
Manufacturing activity expanded moderately over the survey period as both production and new orders rose. Activity was slightly stronger among non-durable goods firms, with production rising moderately above year-ago levels. Durables goods manufacturing also increased, and although production remained below pre-pandemic levels, new orders rose above levels from a year ago. Production and new orders for both durables and non-durables were expected to increase moderately in the coming months, while capital expenditures were projected to rise modestly. About 20 percent of manufacturing firms reported that the pace of vaccinations and trajectory of the pandemic had increased product demand, and a quarter indicated that they had relaxed COVID cautionary measures in the workplace.

Outside of manufacturing, sales in transportation, wholesale trade, and professional and high-tech services rose moderately and additional moderate gains were anticipated in the months ahead. Wholesale trade and transportation sales were moderately above year-ago levels, while sales in professional and high-tech services remained slightly lower. Capital expenditures edged down in professional and high-tech services but increased among transportation and wholesale trade firms. In the coming months, capital expenditures were expected to increase slightly in transportation but fall slightly in the wholesale trade and professional and high-tech sectors.

Real Estate and Construction
Residential real estate activity expanded moderately, and commercial real estate activity held fairly stable. Home prices rose notably in March as inventories declined moderately and sales increased. These trends were expected to continue moving into the spring buying season. Construction supply sales fell modestly but were expected to rise in the coming months. Vacancy rates for commercial real estate edged down and prices and absorption rates increased slightly. Commercial construction activity held steady. However, sales and rents fell slightly, and contacts noted that developers' access to credit had become modestly more difficult. Commercial real estate contacts expected modest increases in sales, prices, absorption rates, and construction in the months ahead. Vacancy rates and rents were expected to remain flat and developers' access to credit was expected to get modestly more difficult.

Banking contacts reported increased loan demand and improved loan quality in March, and expectations for the next six months were increasingly positive. Overall loan demand increased slightly, driven by modest increases in the demand for residential and commercial real estate loans. Bankers reported a slight increase in consumer, commercial, and industrial loan demand, while agricultural loan demand decreased slightly. Commercial and industrial loan interest rates decreased modestly, with comments indicating a highly competitive market. One business reported that capital was "extremely available", and the terms were the "best that [the company] has ever experienced." Overall credit standards held constant, and loan quality improved modestly in comparison to a year ago. Bankers expected a slight improvement in loan quality over the next six months. Deposit levels increased robustly in March, with anecdotal evidence suggesting stimulus checks led to the large gains.

District energy activity increased moderately since the previous survey. Revenues and profits expanded for most firms, while employment continued to lag year-ago levels. The number of active oil and natural gas rigs expanded slightly, mostly due to more active oil rigs in New Mexico. On average, most District firms reported needing higher prices for drilling to be profitable for oil, but lower prices for natural gas to be profitable compared to previous survey periods. Across the District, financing options and access to credit improved. Most firms indicated increased regulation (federal, state, or local) and OPEC production decisions posed the greatest risks to their business over the next year. However, firms' expectations for future oil and gas prices remained higher than in recent survey periods, and more drilling and business activity was anticipated over the next six months.

Agricultural economic conditions in the Tenth District remained favorable, but prospects in the cattle industry were slightly weaker than for other major commodities. Contacts continued to report that strong crop prices were supporting a profitable outlook for most producers. However, the price of fertilizers used in crop production increased rapidly in March, and while many farmers likely had already purchased inputs for the 2021 growing season, a sustained increase in expenses could reduce profit margins going forward. In the livestock sector, hog prices increased sharply in March, while cattle prices remained stable and below pre-pandemic levels. In addition to weak price conditions, drought and higher feeding costs, cattle producers in the southern portion of the District also were adversely impacted by recent winter weather events.

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