Federal Reserve Bank of Kansas City
Summary of Economic Activity
Economic activity in the Tenth District remained stable. Consumer spending continued to expand at a moderate pace, but growth in other business and manufacturing activity was more subdued. Employment levels were mostly unchanged. Many contacts indicated they recently reduced hiring activity relative to their plans at the beginning of the year, indicating expectations for slower job gains through the remainder of the year. In particular, demand for entry-level jobs and hiring of less experienced workers softened significantly. Wage growth remained modest as more contacts reported they were less willing to compete on compensation amid a greater availability of high-quality applicants. Many low-income homeowners exhibited more stress due to the loss of overtime hours they had relied on for paying their mortgages. Sales of single-family homes picked up slightly in recent months, concentrated among homes near or below the median price points for local markets. Both brokers and homebuilders indicated activity is poised to rise if borrowing costs decline even slightly. Similarly, bankers noted the most significant impediment to loan growth was the level of interest rates, rather than the economic outlook or risk appetites.
Labor Markets
District contacts reported little job growth over the last month. In the service sector, a slight decline in employment at professional business service firms was offset by modest hiring at consumer-oriented businesses. Overall, business contacts reported their current hiring plans for the remainder of the year will leave their headcount slightly below levels they expected at the beginning of the year, as many firms reigned in their recruiting efforts in recent months. Businesses reported particular weakness in the labor market for entry-level occupations and in the demand for workers with limited experience. Contacts expressed less willingness to hire inexperienced workers as applicant quality improved with greater availability of more experienced workers. Furthermore, contacts noted they posted fewer entry-level positions as they sought instead to reallocate existing employees from business lines with waning demand. Skilled workers in the trades were a notable exception, where demand for workers remained strong regardless of experience. Wages continued to grow at a modest pace over the last month. More business contacts reported unwillingness to compete on wages for new hires or for retaining employees, reflecting the greater availability of workers.
Prices
Prices continued to grow at a modest pace over the last month. Business input prices grew moderately on average, but cost pressures reportedly varied across business size. Small- and medium-size businesses reported relatively greater business cost pressures compared to larger firms, due to their limited scale and persistently thinner margins. Contacts in the construction sector reported mixed input cost dynamics, with labor costs rising and some input costs, like drywall, still increasing. However, other material inputs like windows and framing materials are falling alongside moderating lumber prices.
Consumer Spending
Consumer spending grew at a moderate rate across several, though not all, discretionary categories. Air travel accelerated, and activity at hotels and resorts expanded accordingly. Contacts in the entertainment sector noted modest growth over already healthy spending levels. Home building and materials stores indicated a moderate pickup in sales to consumers on items related to home maintenance but noted that declines in contractor activity offset household purchases. After rising for several months, contacts at restaurants indicated activity declined modestly due to greater price sensitivity among consumers. Both ticket counts and average ticket values at restaurants fell as consumers ate out less and selected lower price menu options.
Community Conditions
More low- and moderate-income (LMI) mortgage borrowers exhibited signs of stress in recent months. Housing counselors reported the ability of LMI borrowers to absorb a financial shock declined significantly due to two significant factors. First, many LMI homeowners reportedly were losing overtime hours they had relied on for paying their mortgages. Second, lenders indicated many LMI borrowers were struggling to make up the gap on their escrow to meet increases in monthly payments resulting from higher property insurance and taxes. The most common mitigation step was shopping for new insurance, with some contacts noting that homeowners purchased insurance with less coverage and greater personal liability.
Manufacturing and Other Business Activity
Business activity was generally unchanged in the District over the last month. Service contacts reported a slight increase in activity, while manufacturing contacts indicated a slight decline. Reductions in manufacturing were driven by a contraction in durable goods production, as new order activity in this segment declined notably in recent months. Durable manufacturing contacts reported slowing demand for finished goods and equipment, which caused a build-up of excess inventories of intermediate parts provided by smaller less well-capitalized manufacturing firms. Those smaller manufacturing firms expressed concerns about financial stress from lower working capital levels, as inventories have risen.
While global shipping rates increased substantially in recent months, District contacts reported limited impacts on their businesses. Most contacts reported they are not currently facing supply chain disruptions and their transportation costs have only increased modestly in recent months. Contacts anticipate a slight increase in transportation costs over the coming months.
Real Estate and Construction
Sales of single-family homes picked up slightly in recent months, concentrated among homes near or below the median price points for local markets. Contacts noted both pent-up demand for and pent-up supply of homes across the District. Specifically, contacts indicated buying activity is poised to accelerate and property listings are likely to become more available if interest rates were to decline even slightly through the end of the year. Builders of single-family housing also reported expectations construction activity could rise over the near-to-medium term given the availability of development projects that would pencil out at slightly lower borrowing costs, especially given recent declines in the costs of several building materials. However, the limited availability of skilled construction labor remained a challenge for many builders.
Community and Regional Banking
Loan demand was mostly unchanged across categories, though several bankers noted decreased demand for consumer installment loans. Contacts indicated interest rates are the most significant headwind to overall loan growth, followed by concerns about the economic outlook and a lower overall risk appetite on the part of the bank. Few banks noted liquidity as a concern for loan growth, and only as a mild concern if mentioned. While overall loan quality was mostly unchanged, the outlook for credit performance shifted somewhat with more respondents expecting deterioration over the next six months, specifically in the CRE and consumer loan categories. Credit standards were unchanged across lending categories. Deposits grew across a variety of deposit types, with significant drivers of growth being local economic health and regular seasonality. Respondents' commentaries on deposit rate trends were mixed.
Energy
Tenth District oil and gas activity increased slightly over the last month. Profit margins for oil drilling remained solid. Oil rig counts in the District grew slightly in Oklahoma, Wyoming, and Colorado in recent weeks despite a slight decrease in oil prices from this time last month. However, gas rig counts in the District were flat over the last month as spot natural gas prices remained steady and below profitable levels for producers. Additionally, coal production in Wyoming increased considerably in recent months as coal prices rose this summer following a period of steady declines since the start of 2023.
Agriculture
Conditions in the Tenth District farm economy deteriorated slightly alongside weakness in the crop sector and drought in some areas. Prices for major row crops remained low alongside expectations of strong yields and production across many key states. Crop conditions in the District were particularly favorable in Nebraska and Missouri. Winter wheat production was also strong in Kansas and Oklahoma, but recent reports indicated less favorable corn and soybean conditions in Kansas as drought intensified. In the livestock sector, cattle prices remained strong but drought in southern and western portions of the District could hinder hay production and dampen profits. Contacts continued to cite elevated production and living expenses, high interest rates, and declining liquidity as key concerns for the months ahead.
For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.