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Beige Book Report: Kansas City

May 30, 2018

Summary of Economic Activity
Overall Tenth District economic activity expanded at a moderate pace in April and early May, with many contacts expecting further growth in the months ahead. District manufacturing contacts reported a more rapid pace of expansion compared to the previous survey. Consumer spending, energy, and business services activity increased at a moderate pace, while District real estate firms reported a modest pace of growth. Bankers reported a modest increase in overall loan demand and deposit levels, and a moderate improvement in loan quality. Agricultural conditions weakened, but at a slower pace, as most commodity prices have risen slightly. Employment and employee hours continued to rise modestly, and contacts reported modest wage growth with moderate increases expected in coming months. Input prices were up moderately compared to the previous survey period, while selling prices rose modestly.

Employment and Wages
District employment and employee hours continued to rise modestly in April and early May, and expectations were for a slightly faster pace of growth in the months ahead. Contacts in the auto sales, education, restaurant, and health services sectors noted a decline in both employment and employee hours, while all other sectors reported growth. All sectors expected an increase in employment in the months ahead with the exception of auto sales. Respondents noted a shortage of commercial drivers, salespeople, and service workers.

Contacts in most sectors reported modest wage growth and anticipated moderate wage gains moving forward.

Prices
In most sectors, input prices were up moderately compared to the prior survey period, while selling prices grew modestly. In the retail sector, input prices rose moderately and selling prices increased at a modest pace. Restaurant contacts reported flat growth in input prices, while selling prices edged up. Respondents in the transportation sector noted moderate growth in both input and selling prices, and expected continued moderate rises in both. Prices in the construction sector continued to expand moderately, with moderate increases expected in the coming months. Manufacturers reported a modest rise in prices for finished goods, while raw material costs continued to increase moderately. Manufacturers anticipated moderate price gains for both finished goods and raw materials in the next few months.

Consumer Spending
Consumer spending activity grew moderately in April and early May, and firms expected strong growth in coming months. Retail sales increased moderately compared to the previous survey period, and remained well above year-ago levels. Several retailers noted an increase in sales for outdoor and lower-priced items, while higher-priced products sold poorly. Retail contacts anticipated sales to rise considerably in the next few months, and inventory levels were expected to increase moderately. Auto sales rose rapidly after many months of decline and were above year-ago levels. Dealer contacts anticipated a moderate pickup in sales for the months ahead, and inventory levels were expected to increase modestly. Restaurant sales rose modestly and were above year-ago levels. Restaurant contacts expected activity to continue to increase moderately heading forward. District tourism activity rebounded strongly after a slight decline during the last survey period, and contacts expected activity to increase modestly heading into the summer months.

Manufacturing and Other Business Activity
Manufacturing activity expanded more rapidly than in the previous survey period, and the majority of other business contacts reported moderate sales increases. Factory activity accelerated at both durable and nondurable goods plants, particularly for machinery, plastics, and chemicals. Despite rising trade concerns, production, shipments, and new orders grew moderately, and activity was higher than a year ago. Manufacturers' capital spending plans remained solid, and optimism remained high for future activity.

Outside of manufacturing, professional, high-tech, and transportation firms reported moderate sales growth, and wholesale trade contacts reported a strong increase in activity. All firms expected sales to rise rapidly in the next six months. Professional, high tech, and transportation contacts anticipated moderate growth in capital spending plans, and wholesale trade contacts expected strong capital spending growth in coming months.

Real Estate and Construction
Overall District real estate activity increased modestly as residential real estate sales were stable, residential construction activity picked up moderately, and the commercial real estate sector expanded modestly. Residential home sales and inventories were flat compared to the previous survey period, while home prices rose modestly. Sales and inventories of residential homes were expected to remain flat, while home prices were projected to increase. Residential construction activity increased moderately compared to the previous survey period and the same time last year, including higher housing starts, traffic of potential buyers, and construction supply sales. Contacts anticipated additional gains in residential construction activity in the months ahead. Commercial real estate activity continued to increase modestly as absorption, completions, construction underway, and sales increased, while vacancy rates declined. Activity in the commercial real estate sector was expected to expand further moving forward.

Banking
Bankers reported a modest increase in overall loan demand for the month of April. Respondents reported modest increases for commercial real estate, commercial and industrial, and residential real estate loans. Consumer installment loans were down slightly, while agricultural loans were steady. Bankers indicated loan quality improved moderately compared to a year ago. In addition, respondents expected a modest increase in loan quality over the next six months. Credit standards remained largely unchanged in all major loan categories. Overall, bankers reported a modest increase in deposit levels.

Energy
District energy activity increased moderately since the last survey period with steady expectations for the future. The number of oil rigs continued to increase modestly, while the number of active gas rigs was mostly unchanged. Oil and gas production has increased and was expected to continue increasing. Activity has picked up in the Niobrara and Oklahoma shale plays. Oil prices reached their highest level since 2014, which has encouraged additional production. In Wyoming, applications for drilling permits are at record levels as producers seek opportunities to operate in the Powder River Basin. Increased oil and gas production has put pressure on energy transportation infrastructure, and new oil and gas pipeline projects have been announced for Oklahoma's Anadarko region that should alleviate some of the pressure later in the year.

Agriculture
The Tenth District farm economy continued to weaken but the pace of deterioration slowed due to a slight uptick in agricultural commodity prices. Prices for all major agricultural commodities in the District increased slightly during the survey period. Despite the increase in prices, farm income continued to decline and demand for financing remained high. Bankers generally expect the pace of loan demand to increase in coming months and continued to report increased interest rates on all types of agricultural loans, which could raise interest expenses for farm borrowers. However, farmland values remained relatively stable and loan delinquency rates remained low. District contacts expressed concern about liquidity in the farm sector due to further income declines, but the relative stability of farmland values provided ongoing support for both producers and lenders.

For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy