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Beige Book Report: Kansas City

April 19, 2017

Summary of Economic Activity
Economic activity in the Tenth District increased moderately in late February and March, and most sectors expected continued growth in future months. Manufacturing activity expanded at a strong pace, and real estate firms reported a modest rise in sales. Consumer spending activity rose at a modest pace, and District energy activity continued to increase moderately. Professional and high-tech firms reported moderate sales increases, and bankers reported steady-to-increased loan demand, stable deposit levels, and unchanged loan quality. Transportation activity declined modestly from the previous survey period, and agricultural credit conditions remained weak, with subdued farm income and continued low commodity prices. Employment and employee hours increased modestly, and wages rose modestly. In most sectors, input and selling prices were up slightly over the previous survey period.

Employment and Wages
Employment and employee hours increased modestly in late February and March, and expectations were for a continued increase in the months ahead. Contacts in the manufacturing, energy, retail trade, wholesale trade, professional and high-tech services, education, health services, and tourism and hotels sectors reported an increase in employment levels since the previous survey period, while contacts in the auto, transportation, and restaurant sectors noted a decline. All respondents expected a rise in employment in the coming months. Average employee hours rose modestly in the manufacturing, energy, and service sectors, and additional gains were expected moving forward. Respondents noted a shortage of commercial drivers, skilled technicians, and service workers.

Contacts in most sectors reported modest wage growth, and expectations in the coming months were for moderate wage growth.

Prices
In most sectors, input and selling prices were up slightly compared to the previous survey period. In the retail sector, input prices rose moderately and selling prices edged higher. Both input and selling prices were expected to grow moderately in the coming months in the retail sector. Respondents in the restaurant industry reported modestly higher prices for both input and selling prices. Transportation input prices were up slightly, while selling prices increased modestly after falling in the prior survey period. Prices in the construction sector rose moderately, with additional moderate increases expected moving forward. Manufacturers reported slight growth in finished goods prices, while raw material costs continued to edge higher. Manufacturers expected a slight increase in both finished goods and raw material prices over the next few months.

Consumer Spending
Consumer spending activity rose modestly in late February and March, while expectations for future growth expanded markedly. Retail sales increased over the previous survey period, and remained modestly above year-ago levels. Several retailers noted an increase in sales for outdoor and sale items, while luxury products sold poorly. Contacts anticipated sales to rise rapidly in the next few months, and inventory levels were expected to increase. Auto sales continued to fall at a moderate pace, and remained below year-ago levels. However, dealer contacts anticipated a strong pickup in sales for the months ahead. Auto inventories fell slightly but were expected to remain stable in coming months. Restaurant sales edged down modestly and were well below year-ago levels. Contacts expected activity to pick up slightly heading forward. District tourism activity increased markedly in late February and March and was well above year-ago levels. Tourism contacts expected strong activity heading into the spring months.

Manufacturing and Other Business Activity
Manufacturing activity expanded at a strong pace, and most other business contacts reported increased sales. Manufacturers reported a rapid expansion in production, particularly for metals, electronics, and aircraft products. Shipments, new orders, and order backlog all increased over the previous survey, and activity was modestly higher than a year ago. Manufacturers' capital spending plans expanded moderately, and firms' expectations for future activity were at their highest levels in over twenty years.

Outside of manufacturing, professional, high-tech, and wholesale trade firms reported moderate sales increases, while transportation contacts indicated a modest decrease in activity. Wholesale trade firms expected a strong increase in future sales, while professional, high-tech, and transportation contacts anticipated a more moderate sales improvement. Capital spending plans were favorable among most firms.

Real Estate and Construction
Overall District real estate activity expanded modestly in late February and March, and further gains were expected moving forward. Residential home sales rose moderately since the previous survey period, but were slightly below year-ago levels. Residential home inventories were strongly below year-ago levels. Moving forward, contacts projected a solid increase in residential sales due to seasonal factors. Home prices continued to increase strongly, and sales of low- and medium-priced homes outpaced sales of higher-priced homes. Residential construction activity expanded modestly since the previous survey, as construction supply sales, housing starts, and traffic of potential buyers rose. Activity across the commercial real estate sector activity continued to rise at a modest pace as vacancy rates declined and absorption, completions, construction underway, sales and prices increased. A moderate expansion in the commercial real estate sector was expected in the coming months.

Banking
Bankers were evenly split between increasing and steady overall loan demand in late February and March. Regarding specific types of loans, a majority of respondents indicated a steady demand for commercial and industrial, commercial real estate, residential real estate, agricultural and consumer installment loans. Most bankers indicated loan quality was unchanged compared to a year ago. In addition, most respondents expected loan quality to remain essentially the same over the next six months. Credit standards remained largely unchanged in most major loan categories, though almost a third of banks indicated lending standards tightened for agricultural loans. Finally, a majority of respondents reported stable deposit levels.

Energy
District energy activity continued to expand moderately, while expectations eased somewhat but remained solid. The number of active oil and gas drilling rigs grew moderately, mainly in Oklahoma and New Mexico. Contacts reported slight increases in oilfield service costs for completions since last year, and some expected further increases through the summer. Most respondents expected oil and gas prices to stay near current levels in the coming months. For natural gas, the large supply in the Marcellus formation was the main factor keeping price expectations low. Some oil and gas firms also reported having concerns about labor shortages affecting the near-term growth in activity.

Agriculture
Farm income remained subdued in the Tenth District as most agricultural commodity prices stayed low. In the crop sector, corn and wheat prices declined moderately in March and were less than a year ago. Profit margins were expected to remain weak for corn and wheat producers, although some input costs were expected to moderate from last year. Soybean prices also decreased in March but were slightly higher than a year ago. With soybean prices somewhat more favorable, producers were expected to plant more soybeans this year and less corn and wheat. In the livestock sector, cattle prices increased slightly in March and hog prices remained higher than a year ago. Slightly higher prices and lower input costs improved profit margins modestly for both hog and cattle producers since the last reporting period.