Fed Beige Book: Little change to CRE on Balance

Overall Economic Activity
Economic activity increased in most of the U.S., with eight of twelve Federal Reserve Districts reporting modest to moderate growth. Nonauto retail sales grew modestly, as several Districts reported more holiday traffic compared with last year. Auto sales were flat on balance. The majority of Districts indicated that manufacturing expanded, but that growth had slowed, particularly in the auto and energy sectors. New home construction and existing home sales were little changed, with several Districts reporting that sales were limited by rising prices and low inventory. Commercial real estate activity was also little changed on balance. Most Districts reported modest to moderate growth in activity in the nonfinancial services sector, though a few Districts noted that growth there had slowed. The energy sector expanded at a slower pace, and lower energy prices contributed to a pullback in the industry’s capital spending expectations. The agriculture sector struggled as prices generally remained low despite recent increases. Overall, lending volumes grew modestly, though a few Districts noted that growth had slowed. Outlooks generally remained positive, but many Districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.

Summary of Economic Activity
Tenth District economic activity was roughly flat in December and early January, as growth in several sectors was offset by a slowdown in others. Moving forward, expectations were mostly positive for growth in the months ahead. Retail sales were strongly above year-ago levels, but growth in overall consumer spending was tempered by lower auto, restaurant, and tourism sales. Manufacturing activity edged up since the last survey period, and contacts expected modest increases in capital spending in the coming months. Sales rose at a modest pace in the professional and high-tech and wholesale trade sectors but fell modestly in the transportation sector. Residential real estate activity declined modestly, while overall activity in the commercial real estate sector rose slightly. Energy activity eased slightly since the previous survey period, and price expectations for crude oil declined further due to an increase in supply and rising global tensions. The District agricultural outlook remained weak despite slight gains in some commodity prices. Employment and employee hours rose across most industries in the District, and additional gains were anticipated in the months ahead. Wages expanded at a modest pace and were expected to grow at a similar pace moving forward. District prices rose further, and gains in input prices continued to slightly outpace those of selling prices.

Employment and Wages
Employment across the District rose modestly in December and early January, and employee hours edged up. Employment and employee hours were expected to pickup modestly in the months ahead. Respondents in the retail trade, wholesale trade, transportation, professional services, real estate, health services, restaurant, and manufacturing sectors noted rising employment and employee hours, while contacts in the auto sales and tourism sectors reported a decline. Contacts in the energy sector reported no change in employment levels, although slight gains were anticipated moving forward.

A majority of respondents continued to report labor shortages for low- and medium-skill workers, including positions for retail sales, mechanics, technicians, truck drivers, restaurant staff, and specialized IT workers. Wages continued to expand at a modest pace since the previous survey period and were moderately above year-ago levels. Wages were expected to continue their current pace of growth in the months ahead.

Prices
District input prices were modestly higher since the previous survey period, while selling prices rose slightly. The pace of input and selling price growth was anticipated to accelerate in the months ahead. Input prices in the retail and restaurant sectors rose moderately, while selling prices expanded at a modest pace. Respondents in the transportation sector reported flat input and selling prices since the previous survey period, although both were strongly above year-ago levels. Manufacturers noted modest growth in raw material prices, while finished product prices held steady. Prices for finished products and raw materials in the manufacturing sector were expected to rise moderately moving forward.

Consumer Spending
Despite modestly higher retail sales, a decline in auto, restaurant and tourism sales weighed on overall consumer spending compared to the previous survey period. However, contacts expected consumer spending to increase slightly in the coming months. Retail sales rose modestly compared to the previous survey period and were strongly above year-ago levels. Respondents noted seasonal items and lower-priced goods sold well, whereas higher-priced items sold poorly. Auto sales fell modestly since the previous survey period, although contacts expected sales to expand at a modest pace in the coming months. In response to a question about projected capital spending, several auto contacts noted recent downward revisions to capital spending plans for 2019. Restaurant sales dropped moderately since the previous survey period, and contacts anticipated sales to decline modestly in the coming months. Tourism sales sank moderately compared to the previous survey period, but were modestly above year-ago levels. One tourism respondent attributed some of the tumbling sales over the past six months to environmental factors, such as fires and drought seen throughout the summer in parts of the District.

Manufacturing and Other Business Activity
Manufacturing activity edged up compared to the previous survey period, and other business contacts noted mixed sales growth. Although factory activity continued to expand, the pace of growth slowed at both durable and nondurable goods plants due primarily to decreases in metals, electronics, and petroleum/coal products. The level of production and shipments fell slightly whereas new orders and inventories expanded slightly since the previous survey period. Production, shipments, inventories and new orders each remained above year-ago levels, and manufacturers expected modest increases in capital spending in the coming months.

Outside of manufacturing, firms in the wholesale trade and professional and high-tech sectors experienced modest increases in sales, while transportation firms reported a modest decline. In the coming months, transportation firms anticipated moderate sales growth, and wholesale trade and professional and high-tech contacts expected strong sales growth.

Real Estate and Construction
Real estate activity in the District remained mixed as residential real estate activity declined modestly while commercial real estate activity rose slightly. Residential home sales fell at a moderate pace since the previous survey period, and home prices and inventories continued to rise. Residential sales were expected to be flat in the months ahead, while home prices and inventories were projected to rise further. Sales of low- and medium-prices homes continued to outpace sales of higher-priced homes. Residential construction activity declined slightly since the previous survey period but was anticipated to rise slightly moving forward. Activity in the commercial real estate sector continued to expand at a slight pace as sales, prices, construction underway, and absorption rose, while vacancy rates and completions were flat. Contacts in commercial real estate expected additional slight gains in overall activity in the months ahead.

Banking
Bankers reported a slight increase in overall loan demand compared to the previous survey period. Specifically, respondents reported a slight increase in the demand for commercial and industrial loans. Demand for commercial real estate loans held steady, while demand for residential real estate loans, consumer installment, and agricultural loans fell. Bankers indicated no change in loan quality compared to a year ago and expected a slight decline in loan quality over the next six months. Credit standards remained largely unchanged in all major loan categories, and bankers reported a modest increase in deposit levels.

Energy
Energy activity eased slightly since the last survey period, but production of oil and natural gas remained at high levels. The overall number of active oil rigs across the District was steady, as the number of rigs increased in Kansas and Wyoming and moderated slightly in Oklahoma. The natural gas rig count was relatively flat since the previous survey period. Crude oil inventories remained well above their five-year average, while natural gas stocks dipped lower. In December, crude oil prices continued to fall, though more slowly than in November. Price expectations for crude oil were down due to an increase in supply and rising global tensions. In addition, District energy contacts reported lower capital spending expectations for 2019 as a result of the recent decline in oil prices.

Agriculture
The Tenth District farm economy remained weak despite a slight improvement in prices of some agricultural commodities. In the crop sector, prices increased slightly from the prior period. Corn and wheat prices were slightly higher than year-ago levels, but soybean prices remained lower as uncertainty surrounding trade persisted. Although good yields contributed to higher 2018 corn and soybean production in Nebraska, below average yields in Missouri could put downward pressure on farm income. Cotton prices fell sharply since the prior period on expectations of lower ginning activity which, combined with lower 2018 production in Oklahoma due to poor yields, could also reduce revenues. In the livestock sector, cattle prices increased slightly compared to the previous survey period while hog prices were slightly lower.

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