Fed Beige Book: Economy Expands at Moderate Pace

Overall Economic Activity

Economic activity expanded at a modest pace overall from April through mid-May, a slight improvement over the previous period. Almost all Districts reported some growth, and a few saw moderate gains in activity. Manufacturing reports were generally positive, but some Districts noted signs of slowing activity and a more uncertain outlook among contacts. Residential construction and real estate both showed overall growth, but both sectors saw wide variation in sentiment across Districts. Reports on consumer spending were generally positive but tempered. Tourism activity was stronger, especially in the Southeast, but vehicle sales were lower, according to reporting Districts. Loan demand was mixed but indicated growth. Agricultural conditions remained weak overall, but a few Districts reported some improvements. The outlook for the coming months was solidly positive but modest, with little variation among reporting Districts.

Federal Reserve Bank of Kansas City

Summary of Economic Activity
Tenth District economic activity continued to expand slightly in April and early May, and contacts generally expected the pace of growth to accelerate moving forward.Consumer spending rose slightly as sales increased in the restaurant, retail, and tourism sectors. Manufacturing, wholesale trade, transportation, and professional and high-tech activity expanded modestly, and capital spending was projected to rise further in the months ahead. Residential real estate sales expanded at a strong pace since the previous survey period, and commercial real estate activity increased slightly. Energy activity across the District fell slightly, but expectations for future activity remained positive. District agricultural credit conditions and farm income weakened further, but farmland values remained relatively stable. Bankers reported a slight increase in loan demand and a modest improvement in loan quality. Employment and employee hours rose slightly across most sectors, and additional gains were expected in the months ahead. Wages continued to rise at a modest pace since the previous survey period.Input and selling prices continued to rise, with retail contacts reporting the largest gains.

Employment and Wages
Overall District employment and employee hours rose slightly since the previous survey period, and gains were broad-based across sectors. Contacts in the retail trade, wholesale trade, transportation, professional and high-tech services, real estate, tourism and hotels, and restaurant sectors reported steady-to-increasing levels of employment, while respondents in the auto sales and health services sectors noted a decline. All reporting sectors noted steady-to-rising employee hours, with the exception of health services. Additional gains were expected in both employment and employee hours moving into the summer months.

A majority of contacts continued to report labor shortages for low- and medium-skill workers, including sales representatives, truck drivers, construction workers, and hourly retail and restaurant positions. A few respondents also noted shortages in high-skill occupations such as physicians, pilots, accountants, and IT professionals. Wage growth continued to rise modestly since the previous survey period, and wages were expected to increase at a faster pace moving forward.

Prices
District contacts noted modestly higher input prices and slightly higher selling prices. Retail sector contacts continued to note strong growth in input prices and moderately higher selling prices since both the previous survey period and one year ago. Input and selling prices in the retail sector were projected to continue to rise at their current rate of growth. Respondents in the transportation sector reported moderately higher input prices, while selling prices rose modestly. Input and selling prices in the restaurant sector rose slightly but were strongly above year-ago levels. Construction supply contacts reported modestly lower prices but expected prices to increase in the months ahead. Manufacturers noted slightly higher prices for finished products and raw materials, but expected stronger gains moving forward.

Consumer Spending
Consumer spending rose slightly compared to the previous survey period, and contacts expected the pace of sales growth to increase this summer. Despite nearly half of retail contacts noting negative impacts from recent severe weather conditions, growth in retail sales picked up compared to the previous survey and was at a moderate pace. Auto contacts reported a moderate drop in sales, although expectations remained positive. Auto contacts noted SUVs and trucks sold well, while sedans sold poorly. Restaurant sales rose slightly compared to the previous survey period and were strongly above year-ago levels. Tourism and hotel sales grew slightly compared to the previous survey period, but sales were slightly below year-ago levels. Respondents in the restaurant, tourism and hotel sectors projected slight growth in the coming months.

Manufacturing and Other Business Activity
Manufacturing activity continued to expand modestly, and business contacts in the wholesale trade, transportation, and professional and high-tech sectors reported modestly higher sales. Factory production rose at both durable and nondurable goods plants, with stronger growth in food, plastics, and metal manufacturing. Production, shipments, and new orders in the manufacturing sector were mostly flat, but increases were expected in the coming months. In addition, manufacturing contacts anticipated modest increases in capital spending in the next few months.

Outside of manufacturing, firms in the transportation, wholesale trade, and professional and high-tech services sectors experienced modestly higher sales compared to the previous survey and year-ago levels. Contacts in the professional, high-tech and transportation sectors expected sales to continue to expand modestly, while wholesale trade sector contacts anticipated strong sales growth in the months ahead.

Real Estate and Construction
District real estate activity grew at a modest pace in April and early May, and additional gains were expected in the months ahead. Residential home sales experienced solid gains compared to the previous survey period driven by positive seasonal factors, but sales were strongly below year-ago levels. Residential real estate contacts noted that sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Residential selling prices and inventories rose moderately, and respondents projected steady prices and moderately higher inventories in the months ahead. Residential construction activity continued to rise at a modest pace since the previous survey period as traffic of potential buyers, housing starts, and construction supply sales rose. Contacts expected additional gains in residential construction activity in the coming months. Commercial real estate activity increased slightly as absorption, completions, construction underway, sales, and prices rose. Respondents in the commercial real estate sector projected a slight acceleration in activity moving forward.

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

Energy
Energy activity in the District edged slightly lower compared with the previous survey period, but expectations for future activity remained solid. While oil prices inched down recently, they remained higher than the average price needed to be profitable for most District firms. The number of active oil and gas rigs continued to decrease, including a drop in active oil rigs in New Mexico, Oklahoma, and Wyoming since the last survey period. Production of oil and gas remained at high levels across the District, and the level of natural gas stocks rose. District firms expected oil and gas production to expand further in 2019.

Agriculture
Farm income and agricultural credit conditions weakened slightly in the Tenth District. Specifically, regional contacts indicated that farm income decreased modestly and farm loan repayment rates slowed slightly since the last survey period. Conditions deteriorated more in Missouri and Nebraska, where contacts reported a moderately faster decline in income and slower rate of loan repayment. District contacts also commented that low commodity prices continued to strain working capital, and recent severe flooding and blizzards may have significantly impacted some borrowers. Cattle, soybean and wheat prices decreased slightly over the period, while corn prices increased moderately and hog prices increased significantly, which could improve revenues for some producers moving forward. Alongside weaknesses in farm finances, interest rates on farm loans increased modestly throughout the District, but farmland values in the region remained relatively stable.

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