Beige Book Report: Kansas City
September 8, 2021
Summary of Economic Activity
The Tenth District economy grew at a modest pace through August, as the pace of growth in the services sector slowed slightly. Most businesses indicated they do not anticipate changes in activities due to the recent surge in COVID cases, but many did note that they altered their business operations in some way and expect overall activity to decrease in coming months. Retail spending grew in August at a slower pace than in recent months, primarily due to a decline in spending on motor vehicles. Consumer spending on other services continued to grow at a modest pace, as activity at leisure and hospitality businesses expanded over the last month. Growth in manufacturing remained robust, and expectations for conditions over the next six months continued to be elevated. Energy activity increased modestly but without gains in employment. Declines in oil prices contrasted with increases in natural gas prices left revenues and profits mixed among District contacts. Conditions in the agricultural sector were generally strong, but drought conditions adversely affected several states in the Tenth District. Wage growth remained elevated, and employment expanded amid broad labor shortages. Across sectors contacts reported higher prices for materials, and anticipated higher selling prices.
Employment and Wages
District employment gains were mixed across sectors. Within services, contacts at motor vehicle dealers, health care providers, and accommodation businesses reported declines in employment. These losses were more than offset by hiring within other service sectors and gains in employment at manufacturing businesses. Most contacts expected to further expand the size of their workforces in coming months.
Wage growth continued at a robust pace across most sectors of the Tenth District economy. Contacts indicated that they expect wage growth to continue over the next six months.
The number of workers leaving their jobs for other employment was elevated and labor shortages continued to restrain hiring. Firms adopted a variety of strategies to attract and retain workers, including wage increases, sign-on bonuses and on-the-job training, particularly when recruiting for entry-level occupations. Several contacts indicated that rising wages for new hires led to wage compression among existing employees, causing them to raise wages across much of their workforce.
Although rising COVID cases led some firms to alter their operations, few contacts reported reducing employee hours in response to the recent surge.
Prices
Contacts across sectors reported robust increases in input prices that are being passed on, at least in part, to customers, as selling prices also rose. Most contacts also noted expectations for further price increases over the next six months. Lumber prices were a notable exception to rising input prices as contacts at construction supply businesses reported declining prices. Across manufacturing sectors, several contacts pointed to rising prices and limited availability of steel products as constraints on meeting business demand.
Consumer Spending
Consumer spending grew modestly throughout July and August. Demand at restaurants and hotels expanded. However, several contacts noted that reservations were down in recent weeks more than anticipated, and others reported expectations for activity at food and accommodation businesses to decline in coming months due to the rising number of COVID cases. Retail activity rose, but at a slower pace than in recent months. Auto sales declined, as did activity at health services businesses. Sales at wholesale businesses continued to grow at a moderate pace, and few contacts in the sector expected headwinds from the recent surge in COVID cases.
Manufacturing and Other Business Activity
Manufacturing activity expanded at a robust pace in July and August, particularly for producers of durable goods. Contacts expect demand to remain elevated for durables and the number of new orders remains high. Durables manufacturers increased employment despite facing difficulties in recruiting and retaining workers. Supply constraints continue to beleaguer businesses, yet contacts reported that they expect the backlog in orders to diminish somewhat in coming months. Inventories of materials grew modestly from June levels. Activity among producers of nondurable goods declined slightly, however expectations for growth over the next six months remained elevated. In particular, activity at food manufacturing plants declined slightly despite strong demand because of difficulties maintaining a workforce. Expectations for future capital expenditures were unchanged and continued to be high across manufacturing firms.
Outside of manufacturing, activity grew at a slight pace. Conditions were mixed across businesses, though professional and high-tech services and transportation services expanded generally.
Contacts continued to point to labor shortages as constraints on activity. Across manufacturing and other businesses, the number of workers leaving their jobs for higher compensation was elevated, as was the number of workers who reported leaving for retirement. When attempting to recruit new workers, businesses noted that the number of applications for open positions was low, and that applicants often lacked requisite qualifications or were not willing to accept offered levels of compensation.
Real Estate and Construction
Residential real estate activity expanded slightly and expectations for the next three months were somewhat lower than reported previously. Buyer demand remained elevated but the inventory of homes for sale remained flat, resulting in robust growth in home prices. Contacts reported new starts for construction of homes were targeted toward middle-income buyers and that both material costs and lot prices for new projects increased in recent months. Vacancies at commercial real estate properties continued to decline, while both sales and prices of commercial properties grew at a moderate pace. Contacts reported robust growth in demand and valuations for warehouse properties. Activity at construction supply businesses exceeded expectations in July and August.
Banking
While overall loan demand showed modest growth in recent weeks according to Tenth District banking contacts, that growth was due solely to increases in demand for commercial real estate loans. All other categories, including commercial, industrial, residential real estate, consumer installment, and agriculture lending, faced a slight decline in demand. Credit standards remained stable across all categories. Average loan quality has increased strongly compared to a year ago, although bankers expect it to decline slightly over the next six months. Deposit levels continued to increase at a moderate rate, with anecdotal evidence suggesting the growth has been concentrated in demand deposit accounts.
Energy
District energy activity expanded modestly during July and August. The number of active oil and natural gas rigs ticked up slightly in Oklahoma, New Mexico, and Wyoming. Production levels were relatively steady across most district states compared to a year ago but increased more in New Mexico. However, contacts reported that oil and natural gas inventories are lower than a year ago. Energy employment was mostly unchanged compared to the previous survey period and is still below pre-COVID levels. Oil prices declined somewhat, while natural gas prices increased moderately. Thus, depending on the composition of activities, contacts reported varying levels of revenues and profits as compared to recent months. Most firms continued to expect higher commodity prices moving forward over the next six months.
Agriculture
In the Tenth District agricultural economy, farm income and credit conditions continued to improve despite weakness in the cattle industry and severe drought in some areas. Crop and hog prices remained at multi-year highs, and the condition of corn and soybeans was slightly better than the national average in most District states through early August. However, profit opportunities for cattle producers remained limited. Contacts in the meat packing industry also reported that tight labor markets were slightly constraining production capacity at some facilities. As a result of widespread drought, over 60% of pasture and range land in Wyoming was in poor or very poor condition as of early August; compared with about 30% in Colorado and New Mexico and 20% or less in all other states.
For more information about District economic conditions visit: www.KansasCityFed.org/research/regional-research