Beige Book Report: Kansas City
December 1, 2021
Summary of Economic Activity
The Tenth District economy continued to expand at a moderate pace through November. Activity at non-durable manufacturing facilities rose and durable goods production remained at high levels. Several contacts noted a shift in their approach to managing supply chain disruptions toward a strategy of holding larger inventories, adding demand for key inputs. Retail spending continued to grow generally, but event and entertainment businesses experienced a moderate decline in attendance and bookings. Conditions in the agricultural sector remained strong, supporting ongoing growth in farmland values. Job gains were broad-based. Demand for workers was driven by strong customer demand as well as a need to alleviate strains on current employees. Prices rose as labor costs, material costs and transportation costs remained elevated. Several contacts noted that wage pressures were particularly strong among low-skill and front-line workers, where competition among businesses has led to a significant number of workers switching jobs.
Employment and Wages
Employment grew at a moderate rate in the Tenth District during October and November. Manufacturers of non-durables added jobs and significantly increased the number of hours worked after facing several months of anemic growth. Job gains at restaurants slowed initially at the emergence of the COVID-19 Delta variant, but picked back up in recent weeks. Contacts continue to report that demand for additional workers remains high.
Businesses reported numerous motives for adding jobs, including the need to meet elevated demand from customers as well as to alleviate strains on their current workforces and to address skill shortages. Hiring activity continues to be restrained by a lack of qualified candidates and a declining number of applicants. Most businesses reported that employment levels are at, or near, pre-pandemic levels. Of those that still have jobs outstanding, most expected employment levels to fully recover by the end of next year.
Wages grew at a robust rate over the last two months. While wage growth was broad-based, many contacts noted that wages and benefits paid to low-skill workers increased relatively more quickly.
Prices
Nearly all businesses reported raising prices to customers. However, the extent to which those prices offset increasing cost pressures varied across industries and differed between small and large businesses. Price pressures came from a combination of rising labor costs, elevated material costs and high transportation costs. Several businesses also noted higher costs associated with holding or managing inventories amid supply chain disruptions.
Consumer Spending
Retail spending expanded at a moderate rate and grew broadly across a number of categories. Two exceptions were spending on motor vehicles, which was mostly unchanged, and spending at entertainment venues, which declined slightly as cases of the Delta variant rose in number. Although growth in spending at restaurants slowed slightly in early October, most businesses reported a strong resurgence in patronage in recent weeks. Contacts indicated high confidence that consumer spending will further expand over the next six months and that demand remains elevated.
Manufacturing and Other Business Activity
Manufacturing activity expanded at a robust pace in October and November. Growth in manufacturing over the past year has largely been attributable to durable goods producers. However, contacts at non-durable manufacturers reported an uptick in products shipped and new orders for goods. Expectations for growth over the next six months were near all-time highs across the manufacturing sector. Those expectations were supported by a significant booking of future orders, with several contacts across sectors noting that their business is booked out further than ever experienced previously.
Most contacts attributed the backlogs in their businesses to both demand and supply factors. For example, growth in demand for electronic equipment, motor vehicles and construction projects drove strong demand for microchips and steel products above pre-pandemic levels. Supply disruptions in those markets added to the backlogs in deliveries, but contacts indicated that they are not the sole driver. Regarding steel, contacts were attentive to the new tariff rate quota system negotiated with the European Union and noted that it could lead to additional logistical disruptions and uncertainty when implemented early next year.
Capital expenditures continued to rise at a robust rate across businesses. Some contacts noted that limited availability of vehicles and other heavy machinery are delaying some planned capital outlays. Several contacts indicated strong increases in demand for inventories of inputs to mitigate the consequences of ongoing disruptions, noting this runup is a strategic shift in how their specific supply chains are managed.
Real Estate and Construction
Commercial real estate owners reported declines in vacancy rates in the Tenth District as new leasing activity picked up in recent months. However, most respondents continue to expect vacancy rates to rise over the next six months. Although most contacts commented that access to credit for new development projects and acquisitions was unchanged, some noted shifts in sources of funding and changes to covenants required by lenders.
Construction on commercial real estate projects picked up slightly during the October and November, but expectations for future activity have declined steadily over the past year. Falling again in October and November, contacts now report expectations for only slight growth in construction over the next six months.
Banking
Overall loan demand increased modestly in recent weeks, but was mixed across categories. Commercial real estate loan demand increased modestly, with consumer lending and other commercial and industrial loan categories remaining stable. Bankers reported a slight decline in agriculture loan demand and in demand for residential real estate loans, consistent with seasonal patterns. Credit standards generally held steady. Bankers experienced modest improvement in loan quality compared to a year ago, although they anticipate a slight decline in loan quality over the next six months.
Energy
Tenth District energy activity continued to grow at a moderate rate through November. The number of active oil rigs increased in Oklahoma, though declined slightly in Wyoming compared to the previous survey period. Revenues and profit levels increased considerably from a year ago. Regional contacts continued to report tight credit and lending conditions, limiting near-term production growth, despite high commodity prices.
Prices for oil and natural gas were within the average profitable price range for most firms operating across the District. Still, over half of firms did not expect U.S. oil production to return to pre-pandemic levels. Of those who expected U.S. oil production to recover fully, most expected it to rebound sometime in 2022. Wyoming recently shuttered its last underground coal mine, causing local losses of mining-related jobs. While the state still has several active surface mines, the closure is a further example of the secular decline in coal mining and production across Tenth District states.
Agriculture
Economic conditions in the Tenth District's agricultural sector remained strong amid continued strength in commodity prices. The price of all major crops remained elevated and harvest estimates in November indicated that both corn and soybean production are expected to be at high levels across the District. Cattle prices increased modestly to above pre-pandemic levels in early November. With healthy conditions across the sector, farm real estate values increased sharply from a year ago. District contacts continued to express concerns about high input prices, yet farm income and credit conditions continued to improve and were expected to remain strong in the coming months.
For more information about District economic conditions visit: www.KansasCityFed.org/research/regional-research