U.S. Federal Reserve Beige Book: Kansas City District (Text)

The following is the text of the Federal Reserve Board’s Tenth District-- Kansas City.

TENTH DISTRICT - KANSAS CITY

The Tenth District economy grew at a modest pace in late April and early May, while expectations for activity over the summer months strengthened further. Retail sales and tourism activity increased since the last survey, but automobile and restaurant sales declined. District manufacturers reported modest growth with an increase in production, shipments and new orders in May. Robust growth continued in the residential real estate sector, while commercial real estate activity improved modestly. Slightly higher loan demand and improving loan quality led to improvements in the District banking sector. Falling crop prices and rising production costs limited farm income growth, while the brisk pace of farmland price appreciation moderated slightly. District drilling and mining activity held steady, though energy contacts expected oil and natural gas drilling to accelerate over the next few months. District contacts from most sectors reported moderate price increases, particularly for food, building supplies and raw materials. Wage pressures and labor shortages picked up slightly, but were limited to skilled positions.

Consumer Spending.

Consumer spending rose slightly in late April and early May, with an increase in retail and tourism spending and a decline in automobile and restaurant sales. Contacts in all sectors expected consumer spending to improve substantially over the next three months. District retail sales grew at a slightly faster pace over the survey period, with appliance and seasonal bridal purchases particularly strong. Tourism activity also rose, and hotel occupancy rates moved sharply higher due to an increase in tourists and business travelers. Average daily room rates moved higher and were expected to rise slightly in the months ahead. Restaurant sales declined slightly since the last survey but were expected to improve over the next few months. Automobile dealers reported fewer sales, increased inventories and fewer incentives offered. However, the majority of dealers still expected faster sales growth in the coming months due to pent-up demand, low interest rates and increased consumer confidence.

Manufacturing and Other Business Activity.

After contracting for seven months, District manufacturing activity increased modestly in May. Contacts reported a rise in production, shipments and new orders, though hiring activity and average employee work weeks continued to decrease. Manufacturing expectations were strong for the coming six months, led by optimism for increased shipments, new orders, production, and capital spending. High-tech service firms reported that sales activity and capital spending increased modestly in late April and early May, and were expected to grow over the next three months. Transportation activity slowed with some contacts reporting weather disruptions affecting the industry. Many transportation contacts reported that they planned to adjust cost structures and hiring practices to offset anticipated health care and fuel cost increases.

Real Estate and Construction.

Residential real estate activity remained strong, and commercial real estate improved modestly in late April and early May. Residential real estate sales continued to rise sharply. Prices trended upward and inventories are lower compared to the prior survey period. District contacts reported that low inventories have slowed sales and put upward pressure on prices in some areas. They also reported concerns that appraisals were not keeping pace with price increases. Contacts expected residential sales and prices to increase further, supported by low interest rates and a rise in consumer confidence. As a result of improved sales activity and higher traffic of potential buyers, many agencies hired additional real estate agents over the past month or expected to hire in coming months. Residential builders reported steady construction activity with expectations of moderate growth over the next three months. Commercial real estate activity rose modestly during the past month. Construction activity strengthened and prices and sales inched up, while vacancy rates fell slightly. Contacts expected stronger activity in coming months, noting that several future projects are currently in planning stages. Optimism differed across District states, with commercial real estate construction in Oklahoma expected to be particularly strong, and construction in New Mexico and Missouri fairly soft.

Banking.

In the recent survey period, bankers generally reported slightly stronger loan demand, improving loan quality, and steady deposit levels. Respondents, on average, reported stable demand for residential real estate loans, commercial real estate loans, and consumer installment loans, while demand for commercial and industrial loans increased modestly. All bankers reported steady or improved loan quality compared to a year ago, and they expected the outlook for loan quality to either improve or remain the same over the next six months. Credit standards remained largely unchanged in all major loan categories, and respondents reported average deposit levels remained stable. Bankers reported that the main factors driving positive expectations for future activity were continued economic improvements and increased consumer confidence. Agriculture. Farm income growth softened since the last survey period, and farmland value gains moderated slightly. Farm income growth was limited by falling crop and livestock prices and by high production costs, particularly for fertilizer, seed and livestock feed and forage. Crop prices fell in early April with an announcement that grain supplies were higher than earlier estimates, although some District contacts expressed concerns about crop progress. Winter wheat crop conditions deteriorated further with much of the crop in relatively poor condition. The corn and soybean crops were behind schedule as unseasonably cold weather and late snows delayed spring planting in many areas. Demand for new farm loans remained weak, and contacts reported fewer requests for farm loan renewals and extensions. Farmland values continued to rise, but at a slightly slower pace than last year.

Energy.

Energy activity was stable over the survey period, while expectations for future activity improved. Overall, drilling activity held steady for both oil and natural gas in late April and early May. District contacts reported that drilling in areas rich with natural gas liquids was particularly strong over the past month, and that they expected drilling activity for both oil and natural gas to pick up further in coming months. Wyoming coal production held steady in late April and early May, though demand has weakened over the past year with a shift toward coal alternatives for power generation due to low natural gas prices and environmental regulations. Ethanol production rebounded since the previous survey period due to lower corn prices and steadily improving profit margins.

Wages and Prices.

Wage pressures increased slightly but remained weak during the survey period, while prices rose for raw materials and most finished goods across industries. Labor shortages and wage pressures inched up, with strong demand for skilled workers including technicians, truck drivers, engineers and software developers. Many employers remained concerned about the impact of recent healthcare legislation on labor costs and how these costs might be passed onto consumers or impact profit margins. Retail prices increased moderately over the survey period, and retailers planned to raise prices at a similar pace over the next few months. Food costs continued to rise, and restaurant owners increasingly expected to raise menu prices in response. Similarly, raw material prices rose moderately for manufacturers. While finished goods prices remained fairly flat over the survey period, manufacturers planned to raise finished good prices over the next few months to partially offset higher input costs. Builders and construction supply firms continued to report higher prices for construction materials, particularly lumber. In some cases, construction supply costs rose faster than anticipated, which resulted in more frequent price adjustments and reduced margins. Transportation firms also noted an increase in input prices.

SOURCE: Federal Reserve Board

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