Fed Beige Book: CRE Leasing Advances at a Slow by Steady Rate

Overall Economic Activity

The U.S. economy expanded at a slight to modest pace since the prior report as business activity varied across the country. Reports from Districts representing states in the southern and western U.S. generally were more upbeat than Districts representing the Midwest and Great Plains. Household spending was solid on balance: nonauto retail sales increased modestly, while light vehicle sales were generally robust. Tourism and travel-related spending was up modestly. Housing market conditions changed little. On the business spending side, nonresidential construction increased at a slightly slower yet still modest pace, while leasing activity advanced at a slow but steady rate. Manufacturing activity continued to edge lower. Contacts in some Districts suggested that persistent trade tensions and slower global growth weighed on activity. The early impact of a recent auto strike was limited. Freight shipments stabilized after falling during the previous reporting period. Bankers in many Districts reported moderately rising loan volumes, while activity in nonfinancial services increased solidly. Agricultural conditions deteriorated further due to the ongoing impacts of adverse weather, weak commodity prices, and trade disruptions. Business contacts mostly expect the economic expansion to continue; however, many lowered their outlooks for growth in the coming 6 to 12 months.

Federal Reserve Bank of Kansas City

Summary of Economic Activity
Economic activity in the Tenth District rose slightly in late August and September, with gains in consumer spending, professional and high-tech services, transportation and wholesale trade driving overall growth. Consumer spending rose modestly, led by solid retail and auto sales. Manufacturing activity edged down, driven by continued declines in durable goods plants, but was expected to expand slightly in the coming months. District real estate activity increased, but contacts expected conditions to soften this fall. Energy activity declined in the District as the number of active rigs fell and oil and gas production levels also eased. The agriculture sector remained weak, while crop and cattle prices remained relatively stable. Bankers reported modestly higher loan demand and an improvement in loan quality. Employment levels rose in most services sectors, but contacts in the energy and manufacturing sectors noted a decline. District manufacturing and services firms expected employment to increase by 3 percent on average in 2020. Wages grew modestly, and the pace of gains was anticipated to accelerate in the months ahead. District input and selling prices also rose modestly since the previous survey period.

Employment and Wages
District employment rose since the last survey as a majority of services sector contacts noted increasing employment levels, while contacts in the manufacturing and energy sectors reported a slight decline. Employment levels were above year-ago levels in both the services and manufacturing sectors, but slightly below in the energy sector. Expectations for employment growth were positive across most sectors, and survey respondents in the manufacturing and services sectors expected employment in their firms to rise by 3 percent on average in 2020.

A majority of contacts continued to report labor shortages across all skill levels. Specifically, contacts noted shortages for truck drivers, hourly retail and food-services positions, auto-technicians, pilots, IT personnel, nurses, and skilled construction workers. Wages were modestly higher than the previous survey period, and wage gains were expected to accelerate at a faster pace moving forward.

Prices
District selling and input prices increased modestly in late August and September and were moderately above year-ago levels. Contacts expected additional gains in the coming months. Retail input and selling prices were strongly above levels from both the previous survey period and the same period one year-ago, and expectations were for similar increases moving forward. In contrast, restaurants reported steady input and selling prices compared to the previous survey period, although both were moderately above year-ago levels. Respondents in the manufacturing and transportation sectors reported modestly higher input and selling prices compared to a year ago and anticipated similar gains in the months ahead. Selling prices in the construction supply sector rose modestly since the previous survey but remained modestly lower than year-ago levels.

Consumer Spending
Consumer spending climbed modestly compared to the previous survey period, and contacts anticipated additional sales growth heading into the winter months. Retail sales rose modestly since the previous survey period, and expectations were for sales to rise in the next few months but at a slower pace. Lower-priced items continued to sell well, while sales of higher-priced items lagged. Auto sales expanded robustly compared to the previous survey period and year-ago levels, and contacts anticipated modest increases in the coming months. Unlike retail and auto contacts, restaurant contacts reported a strong decline in sales in late August and September. However, restaurant sales remained slightly above year-ago levels and were expected to hold steady in the months ahead. Tourism sales were flat compared to the previous survey period, and contacts anticipated a modest decline in the coming months.

Manufacturing and Other Business Activity
Manufacturing activity edged lower compared to the previous survey and year-ago levels, driven by continued declines at durable goods plants. Manufacturers expected activity to expand slightly in the months ahead. New orders and the backlog of orders declined, while factory production and shipments increased slightly. Factory production, shipments, and volume of new orders were expected to increase moving forward. Capital spending remained modestly above year-ago levels, but contacts anticipated much slower growth in the months ahead. One contact attributed delayed capital spending to high tariffs that could not be passed along to customers.

Outside of manufacturing, firms in the transportation sector experienced moderately higher sales, while sales increased strongly in both the wholesale trade sector and professional and high-tech services sector. Expectations for all three sectors were for strong growth moving forward.

Real Estate and Construction
District real estate activity increased since the last survey, but residential construction activity declined and contacts expected a slower pace of overall real estate activity moving forward. Contacts in the residential real estate sector reported modestly higher home sales and inventories since the previous survey, and inventories were projected to hold steady in the months ahead. Residential real estate respondents continued to note that sales of low- and medium-priced homes outpaced sales of higher-priced homes. Residential construction activity fell modestly in late August and September and was projected to decline further this fall. Commercial real estate activity rose slightly as sales increased, construction underway was flat, and vacancy rates fell. Commercial real estate contacts projected activity to continue to expand but at a slightly slower pace in the next few months.

Banking
Bankers reported a modest increase in overall loan demand across several categories. Respondents indicated a modest increase in demand for residential real estate loans. Demand for agricultural and consumer installment loans increased slightly from previous levels, while the demand for commercial real estate and commercial and industrial loans declined slightly. Bankers indicated modest improvement in loan quality compared to a year ago, but expected a slight decrease in loan quality over the next six months. Credit standards remained largely unchanged in all major loan categories, and deposit levels were stable.

Energy
District energy activity decreased since the previous survey period, and expectations for future drilling and business activity also declined. The number of active rigs continued to fall across most District states in both the oil and gas sectors. Oil and gas production levels also eased in the third quarter, and District energy firms reported drilling and business activity levels were below those from this time last year. Firms reported that total revenues, profits, employment levels, and access to credit also declined. Sixty percent of regional energy contacts indicated that current low prices for oil and natural gas were the main constraint limiting near-term growth in activity among areas where their firms were active. Additionally, a majority of District energy contacts expressed negative impacts from trade tensions and tariffs over the past year, and most firms anticipated negative business effects from trade policy to continue in 2020.

Agriculture
Agricultural economic conditions in the Tenth District generally remained weak. Major row crop and cattle prices were generally stable following sharp declines in the prior period. U.S. corn and soybean production was expected to decline slightly in 2019, but not enough to materially reduce large outstanding supplies. In contrast to other areas of the U.S., a slight increase in corn production was expected throughout the region and could contribute to a slight improvement in revenues. Conversely, soybean production was expected to be moderately lower, and prices continued to be damped by on-going trade disputes. In the livestock sector, recently disrupted beef production channels continued to put downward pressure on cattle prices, but stronger pork exports drove a moderate increase in hog prices. In addition, the distribution of 2019 USDA trade relief payments could provide additional short-term support to farm cash flows.

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