Martens Companies 

Fed Beige Book: CRE Construction Activity Increased and Commercial and Commercial Rents Rose

Overall Economic Activity
Economic activity continued to expand at a modest pace overall from mid-May through early July, with little change from the prior reporting period. In most Districts, sales of retail goods increased slightly overall, although vehicle sales were flat. Activity in the nonfinancial services sector rose further. Tourism activity was broadly solid, with Atlanta and Richmond recording robust growth in this sector. Although some Districts continued to report healthy expansion in the transportation sector, others noted that activity declined modestly. On balance, home sales picked up somewhat, but residential construction activity was flat. Nonresidential construction activity increased or remained strong in most reporting Districts, and commercial rents rose. Manufacturing production was generally flat, but a few Districts noted a modest pickup in activity since the last reporting period. Agricultural output declined modestly following unusually heavy rainfall in some areas, and oil and gas production fell somewhat. Increased demand for loans was broad-based, with all but two Districts noting some growth in financing activity. The outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty.

Federal Reserve Bank of Kansas City

Summary of Economic Activity
Economic activity in the Tenth District continued to expand slightly in late May and June, and contacts generally expected a faster pace of growth moving forward. Consumer spending continued to rise slightly as higher sales in the retail and restaurant sectors offset weakness in the auto sales and tourism sectors. Contacts in the manufacturing, wholesale trade, and professional and high-tech services sectors noted flat activity, while respondents in the transportation sector reported modestly lower sales. District real estate activity increased modestly as residential real estate sales remained robust and commercial real estate activity rose modestly. Energy activity across the District expanded slightly, but expectations for future activity fell. District agricultural conditions remained weak, and unfavorable weather significantly delayed planting and harvesting. Bankers reported moderate growth in loan demand as well as higher loan quality and deposits. Employment and employee hours held steady across the District, while a majority of respondents noted labor shortages. Wages continued to rise at a modest pace since the previous survey period. Input prices rose modestly, while selling prices held steady.

Employment and Wages 
Overall employment and employee hours were fairly steady since the previous survey period, and employment was expected to rise modestly in the months ahead. Contacts in the retail trade, wholesale trade, real estate, professional and high-tech services, tourism, restaurant, and manufacturing sectors noted steady or rising employment, while respondents in auto sales and health services noted a decline. Employee hours were mixed across reporting sectors.

A majority of contacts continued to report labor shortages for low- and medium-skill workers, including construction workers, truck drivers, hourly restaurant and hospitality positions, and auto technicians. A few respondents also noted shortages in high-skill occupations such as pharmacists, IT personnel, engineers and pilots. Wage growth continued to rise at a modest pace since the previous survey period, and additional gains were expected moving forward.

Prices 
District input prices continued to rise modestly, while selling prices held steady. Contacts in the retail sector reported moderate growth in input prices and modestly higher selling prices since the previous survey period. Expectations were for strong growth in both selling and input prices in the months ahead. Respondents in the transportation sector reported flat input and selling prices since the previous survey period, but both were moderately above year-ago levels. Input prices in the restaurant sector rose modestly since the previous survey, while selling prices edged down. Contacts in the restaurant sector expected strong growth in input prices and moderate growth in selling prices in the months ahead. Construction supply respondents continued to report modestly lower selling prices but expected strong gains in the months ahead. Manufacturers noted prices edged up for both finished products and raw materials, and expectations were for prices of finished products to hold steady and raw materials prices to rise modestly.

Consumer Spending
Consumer spending grew slightly compared to the previous survey period and year-ago levels, and contacts anticipated modest increases in spending in the coming months. Retail contacts reported moderately higher sales compared to the previous survey period and expected strong growth in the next few months. Retail respondents noted that lower-priced items sold well, while higher-priced items sold poorly. Auto sales continued to fall moderately compared to the previous survey period, although respondents anticipated modest sales increases moving forward. Restaurant sales picked up moderately compared to the previous survey period and continued to be strongly above year-ago levels. However, restaurant respondents anticipated a slight decline in sales in the coming months. Tourism sales fell modestly compared to the previous survey period, and sales were similar to year-ago levels.

Manufacturing and Other Business Activity 
Manufacturing activity was flat compared to the previous survey period, and business contacts in the wholesale trade, transportation, and professional and high-tech sectors reported flat or falling sales. Factory production fell slightly due to a decline in activity at durable goods plants, notably those producing computers, electronic products and transportation equipment. Shipments and new orders in the manufacturing sector remained mostly flat, but modest increases were expected in the coming months. Capital expenditures were slightly above year-ago levels, and contacts anticipated additional slight increases to capital spending in the months ahead.

Outside of manufacturing, firms in the transportation sector experienced modestly lower sales compared to the previous survey period and firms in the wholesale trade and professional and high-tech services sectors reported flat sales. Contacts in the professional, high-tech, and transportation sectors expected sales to expand slightly-to-modestly in the months ahead, while wholesale trade sector contacts anticipated strong sales growth moving forward.

Real Estate and Construction 
District real estate activity expanded at a modest pace in late May and June, and additional growth was expected in the months ahead. Residential home sales and inventories were solidly above previous survey period levels, and similar gains were expected moving forward. Residential real estate contacts noted that sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Home selling prices fell modestly since the previous survey period but were similar to year-ago levels. Residential construction activity was moderately below year ago-levels, but contacts expected positive gains in the coming months. Commercial real estate activity rose modestly as absorption, completions, construction underway, sales, and prices rose, while vacancy rates fell. Respondents in the commercial real estate sector projected a slight deceleration in activity moving forward.

Banking
Bankers reported a moderate increase in overall loan demand since the previous survey period. Respondents indicated slight-to-modest increases in the demand for commercial real estate, commercial and industrial, and consumer installment loans, and a strong increase in the demand for residential real estate loans. Demand for agricultural loans remained steady. Bankers indicated a modest improvement in loan quality compared to a year ago and expected a slight improvement in loan quality over the next six months. Credit standards remained largely unchanged in all major loan categories. Overall, bankers reported a slight increase in deposit levels.

Energy
District energy activity expanded slightly compared with the previous survey period, but expectations for future activity declined somewhat. The number of active oil and gas rigs continued to decrease since the last survey period, especially for oil rigs in Colorado, New Mexico, and Oklahoma. Production remained at high levels. Oil prices inched up recently, while natural gas prices continued to decline. Expectations for future oil and gas prices eased lower, and many firms expected less drilling and business activity in the next six months. However, many regional energy firms reported increased expenditures on software, application development, and related personnel over the last two years, and most firms also expected to increase these expenditures over the next two years.

Agriculture
The Tenth District farm economy remained weak, and delayed planting and harvesting could reduce crop production considerably in some states. Weather conditions led to unprecedented delays in corn and soybean planting in some areas of the region. Wheat harvest was also delayed considerably in Oklahoma, Missouri and Kansas. In late June, the percentage of wheat acres harvested in these three states was less than half of the previous year. While expectations of lower U.S. crop production led to sharp increases in prices over the period, uncertainty about the total number of planted crop acres remained. Weather conditions may also reduce the quality of planted crops, which could dampen revenues for some producers.

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

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