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Beige Book Report: Kansas City

September 12, 2018

Summary of Economic Activity
Economic activity in the Tenth District increased modestly in late July and August, and growth was expected to continue in most sectors. Consumer spending increased slightly since the previous survey period, including gains in retail, auto, restaurant and tourism sales. Manufacturing activity expanded moderately, and respondents in transportation, wholesale trade, professional, and high-tech firms reported higher salesResidential real estate conditions declined slightly, due in part to seasonal effects and higher interest rates, while commercial real estate activity rose modestly. Energy activity across the District held steady, although oil and gas production continued to rise. Agricultural conditions deteriorated further in the District, leading to stronger demand for farm loans and a slight worsening of loan repayment problems. Growth in employment and employee hours varied across sectors, and the majority of respondents continued to report labor shortages and higher wages. Input prices and selling prices rose in most sectors, and additional price gains were expected in the months ahead.

Employment and Wages
Growth in District employment and employee hours varied across sectors since the previous survey, although most respondents expected gains in the months ahead. Contacts in the retail trade, wholesale trade, transportation, restaurant and manufacturing sectors noted rising employment levels. However, respondents in auto sales, professional services, tourism, and health services reported a decline in both employment and employee hours. Employment and employee hours were expected to increase in the next few months in every sector except tourism.

A majority of respondents reported labor shortages for low- and medium-skill workers, due primarily to a lack of qualified applicants. Contacts specifically noted difficulties filling commercial driving positions and most positions within the retail and food-services sectors. Wages rose modestly in most sectors, and moderate wage growth was expected in the coming months.

Input and selling prices rose in most sectors in late July and August, and additional increases were anticipated moving forward. Selling prices in the retail sector increased moderately compared to the previous survey period, while input prices rose robustly. Restaurant contacts reported a slight increase in both input and selling prices and anticipated a faster pace of price gains in the months ahead. Input prices in the transportation sector rose moderately, and selling prices edged up. Respondents in the transportation sector projected strong gains in input prices moving forward. After moderate gains earlier this year, prices in the construction sector held steady and remained moderately above year-ago levels. Manufacturers reported a slight increase in prices for both finished products and raw materials since the previous survey, and a large share of District manufacturing contacts reported that trade developments this year had led to higher input prices.

Consumer Spending
Consumer spending grew slightly compared to the previous survey period, with gains in retail, auto, restaurant and tourism sales. Retail sales and inventories edged up in late July and August and remained well above year-ago levels. Retail contacts anticipated overall activity to increase in the months ahead. Auto sales rose modestly compared to the previous survey period, and expectations were for strong growth moving forward. Auto contacts noted used vehicles and new sport utility vehicles sold well, although most other new vehicles sold poorly. Restaurant sales increased modestly compared to both the previous survey period and year-ago levels, and respondents anticipated growth to continue but at a slightly slower pace in the next few months. Tourism sales expanded at a slight pace but were expected to decrease modestly in the near term. Capital spending plans strengthened within all consumer spending sub-sectors with the exception of tourism.

Manufacturing and Other Business Activity
Manufacturing activity expanded at a moderate pace compared to the previous survey period, and the majority of other business contacts experienced slight-to-moderate sales growth. Factory activity grew moderately at both durable and nondurable plants. The level of production, shipments, and new orders also rose moderately over the survey period and remained higher than a year ago. Although manufacturers' capital expenditures continued to expand moderately, several contacts reported that recent trade developments had lowered capital spending plans.

Outside of manufacturing, firms in the wholesale trade and transportation sectors noted moderate sales growth, whereas contacts in the professional and high-tech sector reported slight growth. A majority of business contacts anticipated moderate sales gains going forward. Transportation contacts expected a modest increase in capital spending in the coming months, while professional, high-tech, and wholesale trade firms projected moderate growth in capital expenditures.

Real Estate and Construction
District real estate activity was mixed, with residential real estate activity declining slightly and commercial real estate activity rising modestly. Residential home sales fell moderately in late July and August and were similar to year-ago levels. Contacts expected further decreases in residential sales, citing seasonal factors and rising interest rates. Sales of low- and medium-priced homes continued to outpace sales of higher-priced homes, and home prices fell modestly. Residential construction activity rose slightly, and unsold home inventories experienced modest growth. Commercial real estate activity expanded at a modest pace as sales, absorption, completions, construction underway, and prices rose; vacancy rates decreased slightly. Expectations in the commercial real estate sector were for modest gains moving forward.

Bankers reported a slight increase in overall loan demand in late July and August. Demand rose slightly for commercial and industrial loans and for commercial real estate loans. Respondents indicated a slight decrease for residential real estate and consumer installment loans, while agricultural loans held steady. Loan quality improved modestly compared to a year ago, and respondents expect loan quality to remain steady over the next six months. Credit standards remained largely unchanged in all major loan categories, and bankers reported a modest decrease in deposit levels.

District energy activity remained steady since the last survey period, and contacts expected gains in the months ahead. The number of active oil rigs was unchanged, while the number of active gas rigs moderated slightly. Oil and gas production continued to expand, and contacts expected solid production increases moving forward. Oil prices were slightly lower than the peak levels reached earlier in the summer, but remained higher than levels in recent years.

Farm income and credit conditions in the Tenth District weakened, and crop prices remained relatively steady following sharp declines in June and early July. The price of corn and soybeans increased modestly in late July, but declined in August to a level similar to the previous reporting period. With agricultural commodity prices generally lower than a year ago, District contacts reported a decrease in farm income in addition to stronger demand for farm loans. Loan repayment problems also worsened slightly throughout the District and were most significant in Nebraska, Colorado, Wyoming and New Mexico. District contacts reported that uncertainty surrounding trade was a primary concern, and the prolonged weaknesses in the agricultural economy were increasingly impacting farm borrower finances. Although interest rates on farm loans continued to increase alongside weakening agricultural credit conditions, farmland values declined only modestly.

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