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Beige Book Report: Kansas City

December 5, 2018

Summary of Economic Activity
Tenth District economic activity increased slightly in late October and November and remained modestly above year-ago levels. Consumer spending was fairly flat as gains in retail and auto sales were offset by declines in restaurant and tourism activity. Manufacturing activity continued to expand moderately in both durable and non-durable goods plants. Sales rose at a modest-to-moderate pace in the professional and high-tech, wholesale trade, and transportation sectors, and additional gains were expected in the months ahead. Residential real estate sales declined modestly and residential construction activity held steady, while overall activity in the commercial real estate sector increased. Energy activity expanded, but the outlook was mixed due in part to geopolitical uncertainty. The agricultural outlook remained weak, with lower soybean prices, weakness in dairy and hog markets, deteriorating farm income, and uncertainty surrounding international trade. Employment and employee hours edged up across most industries, and about half of contacts expected to increase employment in the next twelve months due primarily to strong sales growth and overworked staff. Wage growth expanded modestly, and additional gains were expected. Prices continued to rise, with gains in input prices slightly outpacing those of selling prices.

Employment and Wages
Overall employment and employee hours edged up in late October and November across the District, and expectations were for modest gains in the months ahead. Contacts in the retail trade, wholesale trade, auto sales, real estate, professional services, health services, and manufacturing sectors noted flat-to-modestly higher employment, while those in the transportation, restaurant, and tourism sectors reported a decline. The same sectors reporting an increase in employment, with the addition of transportation, also noted rising employee hours. About half of respondents expected employment to increase at their firm over the next twelve months, while the majority of the remaining respondents anticipated unchanged levels of employment. Those who projected increased employment levels cited expectations for strong sales growth and currently overworked staff as the primary reasons.

A majority of respondents continued to note labor shortages for low- and medium-skill workers, including positions for retail sales, commercial drivers, specialized IT, construction, and restaurant staff. Wages grew modestly since the previous survey, and most contacts reported higher starting wages for new hires. Wages were expected to increase at a similar pace moving forward.

Prices
Input and selling prices continued to rise in late October and November, with the pace of gains in input prices slightly exceeding the growth of selling prices on average. In the retail sector, however, both input and selling prices grew moderately, and additional gains were expected in the months ahead. Respondents in the transportation and restaurant sectors reported modest growth in selling and input prices since the previous survey period, and both were well above year-ago levels. Moderate gains were anticipated for input prices in the restaurant and transportation sector, while modest growth was expected for selling prices moving forward. Manufacturers continued to report modest price growth for finished products and moderately higher prices for raw materials. Raw material prices were projected to increase moderately in the months ahead, while prices for finished products were projected to rise modestly.

Consumer Spending
Consumer spending was fairly flat compared to the previous survey period, however contacts expected modest increases in the coming months driven by projected gains in the retail and auto sectors. Retail sales rose slightly and remained well above year-ago levels. Retail sales and inventory levels were anticipated to increase moderately in the next few months. Auto sales inched up compared to the previous survey period, and contacts expected both sales and inventories to rise modestly in the coming months. Respondents noted SUVs and trucks sold well, whereas sedans sold poorly. Restaurant sales continued to fall modestly, though they remained well above year-ago levels. Restaurant contacts anticipated sales to continue to decline slightly in the coming months. Tourism activity also fell modestly since the previous survey period.

Manufacturing and Other Business Activity
Manufacturing activity continued to expand at a moderate pace, and other business contacts experienced modest-to-moderate sales growth. Factory activity grew at both durable and nondurable goods plants due primarily to increases in metals, aircraft, food, and plastics. The levels of production, shipments, and new orders increased modestly since the previous survey period, and each remained higher than year-ago levels. Manufacturers expected modest increases in capital expenditures in the coming months.

Outside of manufacturing, firms in the wholesale trade and transportation sectors experienced moderate sales growth, and professional and high-tech firms reported modest sales growth. Transportation contacts expected modest growth in the coming months, whereas wholesale trade and professional and high-tech contacts projected strong growth. Wholesale trade and professional and high-tech firms anticipated capital expenditures to increase modestly moving forward, while transportation firms expected capital spending to rise slightly.

Real Estate and Construction
District real estate activity was mixed as residential real estate activity edged down and commercial real estate activity rose. Residential home sales declined modestly since the previous survey period, while home prices and inventories continued to rise. Residential real estate contacts expected steady residential home sales and modest increases in selling prices and inventories in the months ahead. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Overall residential construction activity was flat since the previous survey period, and expectations were for no change moving forward. Activity in the commercial real estate sector increased slightly as sales and prices rose; absorption, construction underway, and completions were flat; and vacancy rates fell. Commercial real estate contacts expected slight growth in overall activity in the months ahead.

Banking
Bankers reported steady overall loan demand compared to the previous survey period. Specifically, respondents reported a slight increase in demand for commercial real estate loans, while the demand for commercial and industrial loans, residential real estate, consumer installment, and agricultural loans fell. Bankers indicated loan quality improved slightly compared to a year ago and expected no change in loan quality over the next six months. Credit standards remained largely unchanged in all major loan categories. Overall, bankers reported a slight increase in deposit levels.

Energy
Energy activity expanded since the last survey period as production continued to grow, although expectations for future activity were mixed. The number of active oil rigs increased moderately, and the number of active gas rigs inched higher. Oil prices fell in November after rising earlier in the year. Expectations are for continued production growth for crude oil in addition to supply increases for natural gas. International geopolitical discussions surrounding waning OPEC production and U.S. sanctions on Saudi Arabia may affect District energy prices and production expectations moving forward.

Agriculture
Farm income and credit conditions in the Tenth District weakened slightly from the last reporting period. Corn, wheat and cattle prices rose slightly. However, weakness in hog and dairy markets, significantly lower soybean prices, and trade uncertainty weighed on the agricultural outlook in the District. Expectations for farm income were lowest in Missouri and Nebraska, which are more concentrated in soybean production than other states in the District. Alongside lower farm income, repayment rates declined slightly and demand for farm loans increased modestly. In addition, producers' working capital deteriorated moderately, and the share of farm borrowers planning to sell mid- to long-term assets increased from a year ago. Despite downward pressure from a weaker farm economy and modest increases in farm loan interest rates, farmland values decreased only slightly.

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