Beige Book Report: Kansas City
October 18, 2017
Summary of Economic Activity
Economic activity in the Tenth District continued to increase at a modest pace in September, and contacts in most sectors expected gains in the coming months. Retail, restaurant, and tourism activity picked up since the last survey, but auto sales fell modestly. The manufacturing sector continued to increase moderately, and capital spending plans were positive. Contacts in the transportation and wholesale trade sectors noted a strong increase in sales, while professional and high-tech firms reported a modest rise in overall activity. Residential real estate activity was mostly flat, with steady home sales and construction activity. The Tenth District's commercial real estate sector continued to expand modestly. Banking respondents reported steady overall loan demand, unchanged loan quality and credit standards, and stable deposit levels. Growth in energy activity in the Tenth District eased since the last survey period, and abundant supply in the natural gas sector continued to weigh on prices and profitability. The agricultural sector continued to soften in the District since the last survey.
Employment and Wages
District employment and employee hours continued to rise at a slight pace in September, and contacts expected additional improvement in the months ahead. Respondents in the manufacturing, energy, wholesale trade, professional services, real estate, health services and restaurant sectors noted an increase in both employment and employee hours compared to the previous survey period, while respondents in the retail trade, auto sales, and tourism and hospitality sectors noted a decrease. Expectations for employment remained positive in all sectors except the auto sales and tourism sectors. The majority of respondents noted it was difficult to find qualified workers, and several contacts noted a shortage of commercial drivers, salespeople, and services workers.
Wages rose modestly in most sectors, and moderate wage growth was anticipated in the coming months.
Input prices rose modestly in most sectors compared to the previous survey period, while selling prices were either flat or slightly higher. In the retail sector, both input and selling prices increased slightly, but at a slower pace than in the prior survey. Restaurant contacts reported modest rises in input prices and steady selling prices, and expectations were for steady selling prices moving forward. Transportation input prices were up strongly, and transportation selling prices edged up. Prices in the construction sector rose moderately, with continued moderate increases anticipated in the coming months. Manufacturers reported modest rises in prices for finished goods, while raw material costs continued to edge higher. Manufacturers expected moderate growth in both finished goods and raw material prices in the next few months.
Overall consumer spending activity was mixed as retail sales, restaurant sales, and tourism activity increased, while auto sales fell further. Consumer spending was expected to increase slightly in the months ahead. Retail sales improved modestly in September and were similar to year-ago levels. Several retailers noted an increase in sales for upholstery and furniture items, while luxury products sold poorly. Contacts in the retail sector anticipated sales to rise moderately in the next few months, and inventory levels were expected to increase slightly. Auto sales continued to fall at a moderate pace and were below year-ago levels. Dealer contacts anticipated a further modest slowdown in sales moving forward, and auto inventories were expected to rise slightly. Restaurant sales increased slightly since the last survey, and were well above year-ago levels. District tourism activity increased slightly, but remained lower than a year ago. Tourism contacts expected activity to improve further this fall.
Manufacturing and Other Business Activity
Manufacturing activity continued to expand at a moderate pace in September, and the majority of other business contacts reported moderate sales increases. Manufacturers reported sustained moderate growth in production and shipments, particularly for chemicals, plastics, and machinery products. New orders and order backlogs grew at a modest pace, and activity was considerably higher than a year ago. Manufacturers' capital spending plans remained favorable, and firms were increasingly optimistic about future activity.
Outside of manufacturing, transportation and wholesale trade firms reported strong sales increases, while professional and high tech firms noted a more modest rise in activity. All firms expected sales to rise considerably in the next six months. Professional, high-tech, and wholesale trade firms reported strong capital spending plans, while transportation firms anticipated a slight decrease in capital expenditures heading forward.
Real Estate and Construction
District real estate activity continued to rise at a slight pace as residential real estate conditions were flat and commercial real estate activity expanded modestly. Residential home sales were steady since the previous survey, and were moderately above year-ago levels. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential home prices increased modestly, while residential inventories decreased. Residential construction activity was flat, with no change in sales of construction supplies, new home starts, and traffic of potential home buyers. Activity in the commercial real estate sector continued to expand at a modest pace, as absorption, completions, construction underway, sales, and prices rose, while vacancy rates declined. Commercial real estate activity was expected to continue to increase at a modest pace in the coming months.
Bankers reported steady overall loan demand since the previous survey, with a majority of respondents indicating stable demand for commercial and industrial, commercial real estate, residential real estate and consumer installment loans. Most bankers reported that loan quality was unchanged compared to a year ago, and expected loan quality to remain essentially the same over the next six months. Credit standards also remained largely unchanged in all major loan categories. Finally, a majority of respondents reported stable deposit levels.
Growth in Tenth District energy activity eased since the last survey period, while expectations for future activity remained solid. The number of active oil and gas drilling rigs was little changed across the District, and contacts expected them to stay near current levels in the coming months. Respondents projected a modest increase in future oil prices and hence higher profits over the next six months. The abundant supply of natural gas was expected to keep weighing on prices and profitability in that sector. Firms surveyed expected Hurricane Harvey to have low to medium impacts on the oil and gas industry. Contacts, on average, estimated the effects on offshore production, trade, and refineries to last five, six and nine weeks, respectively, from the start of Harvey.
The District farm economy continued to soften, but showed some signs of stabilization since the previous reporting period. Farm income in the District was lower than a year ago, but some agricultural commodity prices rebounded slightly. Soybean prices increased modestly from the previous reporting period, and yield expectations remained strong. Wheat prices remained flat, but were higher than a year ago. Corn prices declined slightly amid strong production expectations, but District contacts expected strong crop yields to offset some weakness in prices. Cattle and hog prices declined slightly from the previous reporting period, but also remained higher than a year ago. Farmland values declined modestly in some regions, but generally remained steady in areas with strong crop production.
For more information about District economic conditions visit: www.KansasCityFed.org/Research/RegionalEconomy