Federal Reserve Bank of Kansas City
Summary of Economic Activity
The Tenth District economy continued to expand at a moderate pace. Hiring activity slowed as many businesses pulled back on new job postings, but employment levels were stable. Ongoing tightness in labor markets across the District supported modest growth in wages over the last month. Consumer spending rose at robust pace, driven by particularly strong growth in travel-related consumption. Growth in spending on other non-discretionary categories, such as healthcare and childcare, was lower due to persistent supply constraints. Commercial property sales rose slightly, but with significant reductions in prices as strained borrowers sought to exit certain positions. Commercial real estate lenders noted a slight rise in covenant breaches but were optimistic about the ability to work through the few problem loans that arose. Energy activity continued to decline. With energy price expectations below what is needed for a substantial increase in drilling, contacts expected future drilling activity will remain subdued. Agricultural conditions in the Tenth District faced headwinds from weak crop prices. Generally, consumer prices grew at a modest pace as contacts continued to note little ability to pass along costs.
Labor Markets
Hiring activity in the Tenth District slowed during the past month, with the majority of businesses reporting stable employment levels. Many businesses pulled back on new job postings and reduced staff hours, with the most pronounced declines in hours worked reported by manufacturing firms. Only part of the reduction in hours was attributed to lower demand by businesses. Contacts in both services and manufacturing sectors expressed challenges in hiring stemming from workers' demands for more flexible hours, which constrained the effective supply of labor. Many contacts expected new hiring activity and labor utilization to remain subdued over the next six months.
Despite the cooling growth in demand for labor, ongoing tightness in regional labor markets supported modest growth in wages over that last month. Contacts indicated the pace of wage growth was slower than earlier this year. However, several businesses indicated they enhanced non-wage benefits focusing on education reimbursement, more flexible work schedules, and improved retirement savings plans as strategies for attracting and retaining employees.
Prices
District contacts reported prices for finished goods and services grew at a modest pace over the past month. Most services contacts reported input prices continued to grow at a robust pace, resulting in a deterioration in the ability to pass higher costs on to customers. Conversely, raw materials price growth slowed according to manufacturing contacts, somewhat alleviating their margin pressures. Businesses that recently secured government contracts reported somewhat stronger growth in both selling prices and input prices, indicating fiscal support remains a price pressure within the District. Regarding the cost of shelter, rent growth stabilized across all major District metro areas over the past few months, driven by outsized growth in the supply of newly built units coming available.
Consumer Spending
Household spending expanded at a robust pace, with continued strength in several consumer discretionary categories. Contacts reported that hotel stays grew at a strong pace, driven by both leisure travelers and elevated business travel. Restaurateurs who offer a wide range of price points all reported strong growth in sales. Retail spending also rose, but at a slower pace than travel-related services. Contacts' reported expectations for consumer spending over the next six months generally improved, as fewer firms anticipate slower consumer spending ahead.
Community Conditions
Childcare prices continued to increase, and childcare providers reported parents were unlikely to see relief soon. Providers continued to face challenges in finding and keeping employees, particularly due to the inability to offer competitive pay. As such, several contacts noted some children may not be accepted due to staffing. Subsidy programs were a challenge as they only pay a fraction of what it costs to care for the child, and many providers have either stopped, or capped, their acceptance of subsidies. Contacts noted increasing liability insurance premiums are an emerging challenge for their business. One provider said their premiums increased 94% last year and another suggested a growing informal childcare network is operating without insurance due to the rising costs.
Manufacturing and Other Business Activity
Overall business activity slowed slightly in the District, as modest growth in services activity was offset by slowing manufacturing activity. Growth in the service sector was led by robust growth in consumer discretionary activity at hotels and restaurants. In contrast, manufacturing businesses reported slowing demand, noting moderate declines in production, new orders, and backlogs. However, manufacturing contacts expressed optimism about future activity, with expectations of moderate growth in activity over the next six months. Planned capital expenditures remain subdued compared to historical norms for both manufacturing and services businesses, which contacts attributed to the high cost of capital,
Real Estate and Construction
Commercial property sales and listings rose across the District, but reportedly at steep discounts that contacts suggested will trigger broad price corrections, with Class B office and housing properties being most significantly affected. The anticipated rise in commercial property sales and other financing activity were attributed to strained borrowers seeking relief as covenant breaches on commercial real estate loans picked up slightly. Vacancy rates rose across property types, but with stark differences between their reported drivers. The net supply of new industrial space and multifamily housing units were both significantly above their 10-year average in recent months, which contacts suggested drove vacancies higher for the near term and tempered rent growth. However, demand for office space remained subdued and declines in office leasing activity were the primary drivers of higher vacancies, a dynamic which contacts expect to persist.
Community and Regional Banking
Loan demand was mostly unchanged across categories, albeit with weakness in commercial and industrial lending reported by many institutions. Several bankers noted that loan quality deteriorated broadly, but only modestly. Consumer delinquencies rose from low levels, some problems with specific commercial and industrial loans emerged, and past dues on agricultural loans were up slightly. Yet, bankers noted that overall loan quality remained strong, despite the recent worsening, and that they were optimistic about the ability to work through problem loans, which remain at a very low level. Credit standards were unchanged across lending categories.
Energy
Tenth District energy activity continued its moderate decline. Nearly two thirds of contacts reported activity stayed steady in recent months, while most others reported decreased activity. The number of active rigs in the District fell at a faster pace recently, driven by declines in Oklahoma, as oil prices have fallen from highs earlier this year and natural gas prices remain well below profitable levels. Accordingly, firms' profits and capital expenditures have decreased while employment remained essentially flat. Contacts' near- and long-term price expectations are still under the price needed for a substantial increase in drilling, indicating that future drilling activity will remain subdued for the foreseeable future.
Agriculture
Agricultural economic conditions in the Tenth District remained subdued alongside weak crop prices. The latest planting estimates and favorable growing conditions suggested corn and soybean production could be strong, factors likely to weigh on prices. Grain stocks from last year also remained elevated within District states and across the U.S., putting additional downward pressure on prices and reducing revenue opportunities. Cattle prices remained strong and continued to support favorable profit opportunities for cow/calf producers. Contacts throughout the region reported some deterioration in financial conditions for farm borrowers that was more pronounced in areas more heavily reliant on crop revenues and less concentrated in cattle production. In addition, elevated production costs, interest expenses and farm household expenditures remained primary concerns for many agricultural lenders.
For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.