Fed Beige Book: CRE Construction and Sales Activity Were Steady, Pace of Leasing Increases Slightly

Overall Economic Activity
On balance, reports from Federal Reserve Districts suggested that the economy expanded at a modest pace through the end of August. Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook. Reports on consumer spending were mixed, although auto sales for most Districts grew at a modest pace. Tourism activity since the previous report remained solid in most reporting Districts. On balance, transportation activity softened, which some reporting Districts attributed to slowing global demand and heightened trade tensions. Home sales remained constrained in the majority of Districts due primarily to low inventory levels, and new home construction activity remained flat. Commercial real estate construction and sales activity were steady, while the pace of leasing increased slightly over the prior period. Overall manufacturing activity was down slightly from the previous report. Among reporting Districts, agricultural conditions remained weak as a result of unfavorable weather conditions, low commodity prices, and trade-related uncertainties. Lending volumes grew modestly across several Districts. Reports on activity in the nonfinancial services sector were positive, with reporting Districts noting similar or improved activity from the last report.

Federal Reserve Bank of Kansas City

Summary of Economic Activity
Tenth District economic activity edged up in July and early August, led by increases in consumer spending, wholesale trade and professional and high-tech services.Consumer spending rose modestly, including gains in retail, auto, restaurant and tourism sales. Manufacturing activity fell slightly, and a majority of contacts expected their businesses to be negatively affected by the latest round of U.S. tariffs on China. District real estate activity rose, but the pace of growth in the residential real estate and construction sectors softened. Energy activity held steady, but expectations for future activity eased.District agricultural conditions remained weak, and commodity prices fell with higher-than-anticipated production estimates and ongoing trade disputes. Loan demand increased modestly and loan quality improved, while deposits fell slightly. Employment rose, but contacts in several sectors noted a slowdown in job gains as labor shortages persisted. Wages were mixed across sectors, and a majority of respondents expected the pace of wage growth to remain the same or accelerate in 2020. Input prices rose slightly, while selling prices continued to hold steady.

Employment and Wages
District employment rose, and employee hours held steady since the previous survey period. Compared to a year ago, contacts reported that employment gains were strongest in the real estate, health services and retail trade sectors. However, the pace of job gains had slowed in several sectors including manufacturing, energy, transportation, tourism and auto sales in recent months. Looking ahead, contacts expected employment to increase slightly and employee hours to remain flat in the next few months.

A majority of contacts continued to report labor shortages across all skill levels. Specifically, contacts noted shortages for hourly retail and food-services positions, truck drivers, auto technicians, physicians, pilots and IT personnel. Wages were mixed across industries as services sector wages increased modestly since the previous survey period, while manufacturing wages held steady. A majority of respondents expected wage gains in 2020 to equal or exceed those in 2019.

Prices
Input prices rose slightly in July and early August, while selling prices continued to hold steady. However, both input and selling prices were moderately higher than a year ago, and contacts expected modest gains moving forward. In the retail sector, selling and input prices rose modestly, and moderate increases were anticipated in the months ahead. Respondents in the restaurant sector noted modestly higher input prices and flat selling prices, with both prices strongly above year-ago levels. Manufacturing and transportation contacts reported steady input prices and selling prices since the previous survey period and expected modest growth in the months ahead. Unlike other sectors who all reported higher prices than a year ago, selling prices in the construction supply sector were modestly lower than both the previous survey period and year-ago levels.

Consumer Spending
Consumer spending increased modestly compared to the previous survey period and year-ago levels, and contacts expected slight gains in the coming autumn months. Retail sales continued to rise moderately in July and early August, and contacts anticipated sales to increase modestly moving forward. Auto sales improved, rising slightly higher than the previous survey period after declining earlier this summer. Auto contacts also expected moderately stronger sales in the months ahead. Trucks and SUVs sold well, while sedans sold poorly. Restaurant and tourism sales grew modestly compared to the previous survey period and were above year-ago levels. However, both sectors anticipated modest declines in the coming months.

Manufacturing and Other Business Activity
Manufacturing activity declined slightly in July and early August, but activity remained slightly above year-ago levels. Factory production and shipments edged down compared to the previous survey period at both durable and non-durable goods plants, while new orders declined slightly. Manufacturers anticipated modest increases in production, shipments and new orders in the coming months. Capital spending was modestly above year-ago levels, and slight increases were expected in the months ahead. However, a majority of respondents expected the most recent round of U.S. tariffs on Chinese goods to negatively affect their businesses.

Outside of manufacturing, other business contacts reported mixed sales since the previous survey period. Firms in the transportation sector experienced modestly lower sales, while sales increased strongly in the wholesale trade sector and slightly in the professional and high-tech services sector. In the coming months, contacts in the professional, high-tech and wholesale trade sectors expected sales to expand moderately and transportation sector contacts anticipated modest increases.

Real Estate and Construction
District real estate activity continued to expand, but at a slower pace than the last survey period as growth in the residential real estate sector moderated. Residential home sales and inventories rose, but sales were below year-ago levels. Inventories were expected to continue to increase slightly, while sales were expected to decrease in the months ahead. Residential real estate contacts noted that sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Home prices continued to fall modestly since the previous survey period, but remained higher than a year ago. Residential construction activity edged down and was similar to year-ago levels. Commercial real estate activity continued to expand at a modest pace as absorption, completions, construction underway, sales and prices rose, while vacancy rates fell. Respondents in the commercial real estate sector projected similar growth in the months ahead.

Banking
Bankers reported a modest increase in overall loan demand, with somewhat mixed reports across categories. Respondents indicated a strong increase in the demand for residential real estate loans and a modest increase in demand for consumer installment loans. Demand for commercial real estate loans held steady, while demand for commercial and industrial loans and agricultural loans declined. 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, and deposit levels decreased slightly.

Energy
Overall District energy activity held steady compared with the previous survey period, but expectations for future activity continued to ease somewhat. The number of active oil and gas rigs continued to edge down, primarily driven by a drop in Oklahoma rigs, while drilling in Colorado and Wyoming moved higher since the last survey period. District oil production levels continued to expand in recent months and remained above levels from a year ago. Natural gas production also remained at high levels. Oil prices inched down while natural gas prices continued to decline. Regional firms expected less drilling and business activity in the next six months.

Agriculture
The Tenth District farm economy remained weak, and commodity prices declined in response to supply expectations and trade uncertainty. Regional contacts reported weak farm income in the most recent survey period, but expected slower deterioration in the coming months. Less pessimistic expectations in the second quarter were supported by increases in crop prices earlier in the year. However, sharp declines in crop and livestock prices in August weighed on farm revenues. Hog and soybean prices declined moderately alongside ongoing trade disputes, and cattle prices decreased sharply following a substantial disruption at a major beef processing facility located in the District. Corn and wheat prices also declined sharply following higher-than-anticipated production estimates.

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