OKLAHOMA CITY – Regional services activity, manufacturing and energy production in the Tenth Federal Reserve District, which includes Oklahoma, declined slightly in October, surveys conducted by the Federal Reserve Bank of Kansas City showed.
However, expectation for future growth in regional services activity expanded, in part because of increases in August and September. “This continued a trend of up and down activity in the sector in 2019,” said Chad Wilkerson, vice president and economist at the Oklahoma City branch of the Federal Reserve Bank of Kansas City.
Tenth District manufacturing activity eased slightly in October, and expectations for future activity inched lower but remained slightly positive. “Overall regional factory activity declined again in October,” said Wilkerson. “This was driven by further deterioration in durable goods production, as nondurable manufacturing expanded slightly for the second straight month.”
Energy activity in the Tenth Federal Reserve District decreased moderately and expectations for future activity continued to decline. Firms reported that oil prices needed to be $55 per barrel, on average, for drilling to be profitable, up slightly from six months ago.
10TH DISTRICT COMPRISED OF SOME OR ALL OF OK, MO, KS, CO, NE, NM AND WY
The Federal Reserve Bank of Kansas City serves the Tenth Federal Reserve District, which encompasses the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming; and the northern half of New Mexico. As part of the nation’s central bank, the Bank participates in setting national monetary policy, supervising and regulating numerous commercial banks and bank holding companies, and providing financial services to depository institutions.
The KC Fed’s monthly Survey of Tenth District Services provides information on several indicators of activity, including sales, revenue, employment and capital spending, while identifying changes in prices of input materials and selling prices.
Survey participants represent a variety of industries, including retail and wholesale trade, automobile dealers, transportation, information, high-tech and professional services, real estate, education, restaurants, health services, tourism and other services firms. The survey includes five years of historical data. Contacts were asked special questions about capital investment decisions and difficulties hiring employees.
SERVICE INDUSTRY COMMENTS
“Immigration issues are impacting our ability to grow,” said one service industry contact. “High-end tech workers’ H1 visa issues are shortening the supply and making it hard to grow.” Similarly, another employer said, “Can’t get high-quality, high-tech employees, so to accomplish our goals ... current employees are working longer hours.”
“We feel confident that our company can make needed capital investments in our business without worrying about tax rates escalating over the next four years,” said another. “So much economic uncertainty,” wrote one respondent. “Tariffs, military action, lack of direction in White House.” “Health care expenses are still a major concern as an employer and an employee,” another said.
MANUFACTURING ACTIVITY INDEXES FELL IN OCTOBER
The month-over-month price index for raw materials declined at a slower rate, while the price index for finished products expanded slightly. District firms expected prices to increase over the next six months.
The decline in district manufacturing activity continued to be driven by slower activity at durable goods plants, especially from decreases in non-metallic mineral products, primary metal, fabricated metal products, machinery, computer and electronic products, and transportation equipment manufacturing.
Most month-over-month indexes declined in October, especially for the new orders index. However, the production index remained positive, and the supplier delivery time index inched higher. More than 43% of regional manufacturing contacts indicated that the need to replace existing plant and equipment was the primary driver for capital investment decisions. Nearly 38% of contacts reported future demand expectations was the primary driver for investment decisions, and 13% said economic/political uncertainty was the main factor.
In regards to filling positions, 48% of firms said they had difficulty hiring workers over the past three months because of a lack of qualified applicants. But just over 26% of contacts reported they did not have difficulty hiring workers over the past three months.
“Trade war with China is really hurting our export business, and we’ve had to outsource outside the U.S. to retain only about half of our traditional customer demand in China,” one respondent said. “Besides the lost revenue, profit margins are half due to outsourcing the production.”
ENERGY SECTOR OUTLOOK DIM
Tenth District energy activity decreased moderately in the third quarter of 2019, as indicated by firms contacted between Sept. 16 and Sept. 30. The drilling and business activity index fell from 7 to -23, indicating a significant drop in activity following a slight expansion in Q2 2019. The wages and benefits index remained positive and the employee hours index remained flat. However, the revenues, supplier delivery time, profits, employment, and access to credit indexes all decreased.
Firms also were asked about constraints limiting near-term growth in activity in the top areas where their firm is active. Sixty percent of surveyed firms indicated that current low prices for oil and gas were the main constraints limiting near-term growth. Contacts also reported investor pressures for free cash flow, limited access to capital credit, lack of natural gas pipeline capacity, and problems find- ing workers as primary or secondary constraints to near-term growth.
Finally, respondents were asked about how trade tensions (tariffs) affected their business and expectations for the future. Around 70% of firms reported slightly or significantly negative effects from trade tensions on their business in the past year. A similar share of firms anticipated negative effects from trade policy on their business in 2020.
“There is still an oil glut and global demand growth is tepid,” wrote one survey respondent. “There is an overabundance of natural gas,” noted another. “In some regions they are having to pay people to take it. More infrastructure is needed.”