Beige Book Report: Kansas City
July 14, 2021
Summary of Economic Activity
The Tenth District economy expanded moderately in June, with broad-based growth across most sectors. Consumer spending increased moderately, driven by strong gains in retail sales and moderate growth in restaurant and tourism activity. Manufacturing activity expanded robustly, and the majority of manufacturers indicated that capital expenditures this year would be similar to or higher than pre-pandemic levels. Sales increased slightly in the professional and high-tech services and transportation sectors but declined slightly in wholesale trade. Residential real estate activity rose moderately as home sales increased despite low inventories and robust home price growth. Commercial real estate activity improved modestly, with lower vacancy rates and higher sales. The energy sector continued to expand, and most firms reported higher production levels, revenues, and profits. The farm economy remained strong, with relatively high profit margins for most major commodities. Employment increased, and wage growth accelerated as the majority of contacts continued to report labor shortages. Respondents noted robust increases in input and selling prices, and additional strong price gains were anticipated.
Employment and Wages
District employment increased slightly in the services sector and modestly in the manufacturing sector in June. Within services, gains were concentrated in retail, wholesale trade, and tourism, while employment declined slightly in health services and real estate. Transportation and restaurant contacts noted declines in the number of employees but gains in the number of hours worked. Looking ahead, respondents from all sectors except health services anticipated employment gains over the next six months.
The majority of contacts continued to report labor shortages, with many noting demand for all positions and others noting a particular need for technicians and hourly labor. In response to labor shortages, half of services contacts and two-thirds of manufacturing contacts reported investing in labor-saving automation strategies, with about a third of all contacts indicating a faster pace of investment than in the past. In addition, two District states implemented return-to-work cash incentives, and four states have opted out of enhanced federal unemployment benefits. Wages increased robustly since the last survey and even stronger gains were expected in the coming months.
Prices
Over the survey period, input and selling prices rose robustly in the services and manufacturing sectors, although contacts continued to report that hikes in selling prices were not keeping pace with higher input costs. Within services, input prices rose robustly across all sectors. Transportation and restaurant contacts reported a sizable gap between the pace of growth in input and selling prices. In contrast, retailers were better able to pass along higher input costs onto consumers. Several contacts noted that rising input prices were a primary factor restraining business investment and capital spending. Selling prices for construction supplies increased modestly since the last survey after rising a faster pace earlier this year. Both services and manufacturing contacts expected robust growth in input and selling prices over the next six months.
Consumer Spending
Consumer spending continued to increase moderately in June. Retailers reported robust sales, while tourism and restaurant sales increased moderately. Auto sales increased slightly, but all auto contacts reported that inventories fell further from already low levels. Sales in health services fell slightly since the last survey, but contacts expected a strong rebound in the coming months. Tourism and retail respondents expected sales to continue to rise moderately, while contacts from the auto and restaurant industries anticipated slight gains. Many contacts noted that stronger demand was a primary factor supporting business investment and capital spending for the remainder of 2021.
Manufacturing and Other Business Activity
Manufacturing activity continued to increase robustly in June, with growth in durable goods manufacturing outpacing that of nondurables. New orders increased modestly for nondurable goods and moderately for durable goods. Similarly, production levels increased moderately at nondurable goods plants and robustly at durable good plants. The majority of manufacturers noted that their capital expenditure plans this year were similar to or higher than pre-pandemic levels, with a quarter indicating significantly higher levels. Many contacts attributed this pick-up in investment to strong demand. When asked about 2022, the majority of contacts expected capital spending levels similar to or moderately higher than 2021 levels. Both nondurable and durable goods manufacturers expected robust gains in production and new orders in the coming months, although slightly stronger levels of activity were anticipated for durable goods manufacturing.
Outside of manufacturing, sales rose at a slight pace in the transportation and professional and high-tech services sectors but fell slightly in the wholesale trade sector. Respondents from all three sectors expected moderate sales gains in the coming months. Contacts in all three sectors reported moderate increases in capital spending over the past month. Looking ahead, transportation and wholesale trade contacts expected additional moderate gains in capital expenditures, while professional and high-tech services contacts expected capital spending to hold steady.
Real Estate and Construction
Residential real estate activity continued to expand moderately since the previous survey, while commercial real estate activity rose modestly. Home sales increased moderately despite a moderate decline in inventories from already low levels. Home prices experienced robust growth, and contacts expected this trend to continue over the next few months. Construction supply sales were unchanged over the survey period, but contacts expected moderate declines in the coming months. Commercial real estate conditions continued to improve, with modestly lower vacancies and moderately higher sales, prices, and construction. Absorption rates rose modestly, but contacts also noted that developers' access to credit became modestly more difficult. Looking ahead, contacts expected further gains in commercial real estate activity in the months ahead.
Banking
District banking contacts reported moderate growth in overall loan demand in recent weeks. The increase in demand was concentrated in two categories, commercial real estate and commercial and industrial lending. Loan demand edged down slightly in other categories, including residential real estate, consumer lending, and agricultural lending. Credit standards remained stable across all lending categories as loan quality strongly improved in comparison to one year ago. Bankers expected loan quality to improve moderately over the next six months. Finally, overall deposit levels rose at a modest pace, with comments suggesting that deposit growth was concentrated in liquid accounts such as checking and demand deposit accounts.
Energy
District energy activity continued to increase since the last survey period. The number of active oil and natural gas rigs picked up, with the addition of active oil rigs in New Mexico, Oklahoma, and Wyoming. Along with increased rig counts and production, most firms reported higher revenues and profits in June. Moving forward, most firms raised their expectations for the pace of price increases over the next year. However, the average prices firms reported needing for a substantial increase in drilling to occur also rose considerably. Nearly a third of firms reported that uncertainty about future oil and gas prices was the main constraint limiting near-term growth in activity. Over half of District energy contacts indicated their firms have continued to invest in labor-saving automation strategies because of labor shortages.
Agriculture
Agricultural economic conditions in the Tenth District were strong through June, with profit margins for most major commodities relatively high. Prices of most crops were still near multi-year highs, although had declined slightly since the previous reporting period. Hog prices also remained strong. The winter wheat harvest was delayed slightly in parts of the District, but crop quality was not expected to be hindered and higher production was anticipated throughout the region. In addition, the District's corn and soybean crop was in slightly better condition than the nation in all states except Missouri. In contrast to other commodities, profitability for cattle producers continued to be limited. Drought also persisted in some portions of the District and remained a concern for both crop and livestock producers.
For more information about District economic conditions visit: www.KansasCityFed.org/research/regional-research