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Kansas City: October 2021

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Beige Book Report: Kansas City

October 20, 2021

Summary of Economic Activity
The Tenth District economy expanded at a moderate pace through September. Ongoing growth in manufacturing alongside renewed growth in the energy sector and steady consumer spending supported the regional economy. Increases in oil and natural gas prices led to an expansion of energy activity in several locations throughout the Tenth District. Consumer spending continued to grow during the most recent surge in COVID cases. Unlike previous experiences during the pandemic, the growth in consumer spending was resilient at restaurants and other leisure and hospitality businesses. Business travel did not resume as expected in September, and many large events were postponed. Conditions in the agricultural sector remained strong, except in cattle markets where drought conditions and cost pressures adversely affected ranchers. Employment gains were broad based with jobs being added at a moderate pace. Contacts continued to report rising costs for materials, and also highlighted rising transportation costs as significant and persistent price pressure.

Employment and Wages
Tenth District employment gains were moderate and broad-based over the past month. The number of hours worked increased at most manufacturing and service businesses, including at restaurants and hotels. Entertainment venues were an exception where employment declined more than is attributed to seasonal shifts.

Comparing current labor market conditions to earlier in the summer, the majority of businesses reported difficulties filling open positions have not eased. Contacts noted recruiting for entry-level and low-skill positions remains just as difficult compared to a few months ago. Despite the challenges recruiting qualified workers, most businesses have not changed their hiring plans from earlier this summer. Those that have changed their plans now expect to add more workers than before.

Wages continued to rise broadly in September. Contacts noted increases in other labor expenses such as benefits and job training to attract and retain workers. Furthermore, contacts in several sectors reported using more premium pay for temporary workers as they sought to offset labor shortages.

Output prices rose across most sectors of the Tenth District economy during September. Material input prices also increased, but contacts were mixed on their ability to pass on higher material and labor costs to their customers. Businesses either reported being able to pass along the majority of higher costs to their customers or only a small portion. Price pressures from transportation costs also expanded in recent weeks. Construction materials continued to be an exception to rising input prices, declining further over the past month.

Consumer Spending
Retail spending growth picked up moderately in September, including spending at restaurants. Demand at other leisure and hospitality businesses grew modestly, but contacts noted that the consumer segment of the hospitality industry is growing at a robust rate. Expectations for a resumption of business travel in September were not realized and several event bookings were postponed, which held down overall travel-related spending somewhat. Businesses reported broad confidence that consumer spending will continue to grow over the next six months.

Manufacturing and Other Business Activity
Manufacturing activity continued to expand at a robust pace in September due to increased production of durable goods. Expectations for growth in durable good production over the next six months increased again as new orders from District businesses rose. Several contacts noted that an inability to find sources of steel products and higher steel prices were substantial constraints on overall activity. Labor shortages also weighed on manufacturing activity. Overall production of nondurable goods was unchanged in recent weeks, yet most contacts continue to expect conditions to improve over the next six months.

Transportation costs for Tenth District manufacturing businesses increased in recent weeks, both for domestic and international shipping. Several contacts cited transportation costs as a significant cost pressure being passed to customers and suggested this cost pressure may linger into 2022. Material shortages and delays in deliveries of inputs worsened over the last month.

Capital expenditures are expected to increase at a robust rate among both manufacturing and services businesses. Several contacts noted investments in labor-saving technologies amid worker shortages as well as investments in equipment to scale production amid higher demand.

Real Estate and Construction
Residential real estate activity declined slightly, which most contacts attributed to seasonal factors and a low supply of homes for sale. Home prices continued to rise, with several contacts noting that home price growth in resort areas continues to exceed other parts of the market. Lot prices for new construction also rose during the past month.

Vacancies in commercial real estate properties throughout the Tenth District increased slightly, turning from their slow decline during past months. Expectations for vacancy rates over the next six months also rose. However, commercial property values and underlying rents continued to rise at a robust rate. Demand for industrial and warehouse space continued to grow and exceeds available supply. Contacts across segments of commercial real estate reported that their ability to access credit did not change over the last month.

Sales of construction materials declined at a robust rate, with selling prices and inventory levels also declining. Contacts reported difficulties finding qualified drivers for deliveries and workers for fabrication of materials.

Bankers in the Tenth District reported slight growth in overall loan demand in recent weeks. Changes in conditions were mixed across individual loan categories, with contacts indicating a slight increase in commercial real estate loan demand, but a slight decrease in consumer and agricultural lending. Demand for residential real estate loans declined modestly in September but remained at a high level. Bankers reported steady commercial and industrial loan demand at low levels, as PPP loan forgiveness diminished demand for credit by businesses. Deposits levels have grown slightly over the last six weeks. Credit standards held steady for most categories, except commercial real estate and agricultural lending, which underwent a slight tightening. Overall loan quality has improved moderately in comparison to a year ago and is expected to hold steady over the next six months.

Tenth District energy activity expanded at a moderate pace in September. The number of active oil and natural gas rigs increased in several areas including Oklahoma, New Mexico, and Wyoming. While contacts reported that access to credit expanded slightly in recent months, they also noted investor and lender preferences limiting credit flows to the sector were significant factors constraining further expansion of activity. A majority of firms reported higher revenues and profits as commodity prices increased considerably. Surveyed respondents indicated prices needed for drilling to be profitable increased on average, which some businesses attributed to rising labor costs. Most contacts expected natural gas prices to remain high in coming months. Over half of firms reported minor delays or disruptions due to COVID-19 infections over the past quarter.

Conditions in the Tenth District agricultural sector remained strong. Prices for corn, soybeans and hogs decreased slightly since August, but, along with wheat and cotton prices, remained at multi-year highs. Several contacts noted a desire to hold larger inventories of agricultural products compared to past years, and that the allocation of supply to building inventories is contributing somewhat to current high price levels. Contacts reported ongoing concerns about rising inputs costs putting downward pressure on farm incomes in coming months. Weakness in the cattle industry persisted as concerns about drought and higher input costs intensified. Low cattle prices continued to limit profit margins for ranchers.

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