Beige Book Report: Kansas City
October 19, 2016
Economic activity in the Tenth District rose slightly in September. Consumer spending remained above year-ago levels but declined slightly compared to the previous survey period. Retail sales increased moderately, while sales in the restaurant, auto, and tourism sectors decreased. Manufacturing activity picked up, primarily due to stronger activity in the durable goods sector. Contacts in transportation, professional, and high-tech firms reported moderate growth in sales, but firms in the wholesale trade sector noted mostly flat activity. District real estate activity increased slightly in September despite a seasonal slowdown in residential real estate sales. Conditions in the banking sector were mostly unchanged from the previous survey period as bankers reported steady loan demand, unchanged loan quality and credit standards, and stable deposit levels. Energy activity across the District experienced moderate growth with respondents reporting higher revenues and drilling activity than in the previous survey period. District farm income remained subdued as low crop and livestock prices persisted in part due to high levels of production and inventories. Input and selling prices in most sectors increased slightly, and wages continued to grow.
Consumer Spending
Consumer spending fell slightly in September, but sales remained higher than year-ago levels. Retail sales increased moderately compared to the previous survey period and were slightly higher than a year ago. Several retailers noted that lower-priced and clearance items sold well, while sales of luxury and higher-priced products were sluggish. Retail contacts anticipated mostly flat sales in the next few months, with inventory levels expected to rise slightly. Auto sales decreased at a moderate pace since the previous survey and were considerably lower compared to a year ago. Auto dealers expected a modest decrease in sales in the months ahead, but auto inventories were expected to remain unchanged. Restaurant sales declined moderately but remained above year-ago levels. Sales in the restaurant sector were anticipated to decline in the months ahead. District tourism activity was higher than a year ago, although activity declined in September.
Manufacturing and Other Business Activity
Manufacturing activity increased moderately, and most other business activity was also positive. The improvement in manufacturing activity came mainly from durable goods factories, particularly for machinery and metals products. Production, shipments, and new orders all rose considerably, and manufacturers' capital spending plans were the highest in over a year. Expectations for future activity remained moderately positive.
Outside of manufacturing, contacts in transportation, professional, and high-tech firms reported a moderate increase in sales, with further improvements expected. Wholesale trade contacts noted mostly flat activity but expected sales to improve modestly in the coming months. Professional, high-tech, and wholesale trade firms reported favorable capital spending plans, while transportation contacts expected capital spending to remain unchanged.
Real Estate and Construction
Overall District real estate activity expanded slightly in September. Residential sales were sharply lower than the previous survey period, with most respondents citing seasonal effects for the slowdown. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential inventories experienced modest declines, and home prices were up strongly compared to the same time last year. Activity for residential construction firms increased modestly as housing starts, traffic of potential buyers, and construction supply sales were up over the previous survey period. Contacts in the commercial real estate sector reported modest growth as absorption, completions, construction underway, and sales rose, while commercial vacancy rates declined slightly. Expectations for the commercial real estate market were for continued growth but at a slightly slower pace.
Banking
Most bankers reported steady but improving overall loan demand since the previous survey period. 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, a majority of respondents expected loan quality to remain essentially the same in the next six months. Credit standards remained largely unchanged in all major loan categories. Finally, a majority of respondents reported stable deposit levels, and the number of respondents indicating lower deposits declined.
Energy
District energy activity increased moderately, and the outlook remained optimistic overall. Drilling activity, as measured by the number of active oil and gas rigs, edged higher, particularly in Oklahoma. Firms reported moderately higher revenues this period, but said oil and gas prices still needed to be marginally higher to be profitable. Most respondents projected that global inventories would balance by the second or third quarter of 2017. Therefore, several contacts expected commodity prices to increase moderately in the second half of 2017. Natural gas prices inched higher since the last report period. Most respondents expected prices to continue to increase slightly in the coming months as winter weather drives up demand.
Agriculture
District farm income remained subdued as low crop and livestock prices weighed on revenue expectations. Inventories of wheat remained high, and expectations of a strong corn harvest held grain prices below the previous year. Soybean production was also expected to be at or above record levels, but relatively steady demand has kept prices slightly above a year ago. Crop production costs have decreased modestly, but at a slower pace than crop prices, keeping profit margins relatively weak. In the livestock sector, both cattle and hog prices decreased in September, and were lower than a year ago, primarily due to strong production. Persistently weak farm income and reduced cash flow in both the crop sector and livestock sector have continued to reduce borrower liquidity and has continued to drive demand for agricultural production loans.
Wages and Prices
Input and selling prices were up slightly in most sectors compared to the previous survey period, and wages continued to rise. In the retail sector, input prices grew moderately, while selling prices edged up. Restaurant prices rose modestly and were expected to increase further moving forward. Respondents in the transportation sector reported slight gains in selling prices after falling in the prior survey, and modestly higher transportation input prices. Prices in the construction sector continued to grow moderately, with continued increases expected in the next few months. Manufacturers reported a continued decrease in finished goods prices, despite a modest rise in raw material costs, and both finished goods and raw materials prices were projected to grow in the coming months. Contacts in most sectors reported an increase in wages, though at a slower pace than in the prior survey, and expectations were for moderate gains moving forward. Respondents noted a shortage of commercial drivers, skilled technicians, and salespeople.