Federal Reserve Bank of Kansas City
Summary of Economic Activity
Economic activity in the Tenth District held steady in recent months, led by modest growth in consumer spending. While employment levels were unchanged on net and only a small share of contacts reported staff reductions, reports of declining headcount were somewhat more common in recent months. Even though employment remained steady, manufacturing production and sales of professional services declined across the District. Contacts across sectors reported a significant increase in the amount of time it takes to receive payments from customers compared to the beginning of the year. Few contacts reported that these payment delays resulted in either reduced hiring or capital outlays. However, these delays are reportedly raising financial strains among businesses and influencing their cash management practices. Prices continued to grow slowly over the last month, including growth in housing prices. The deceleration in shelter prices were more evident in areas that experienced rapid growth in recent years, while shelter price pressures remained elevated where rent and housing prices had not risen as fast.
Labor Markets
Employment levels were mostly unchanged across the District on net. Only a small share of contacts reported reducing their staffing levels, though reports of declining headcount were somewhat more common in recent months. More manufacturing firms lowered their headcount than service firms, and they were also more likely to curb overtime hours and reduce the average hourly work week. Contacts that were actively recruiting noted the number of job applicants for open positions greatly exceeded the amount from a year ago. Wage growth continued to decelerate, with compensation levels rising only modestly. Fewer firms indicated they raised wages substantially to retain workers in recent months as quit rates reportedly remained low.
Prices
Prices continued to grow slowly over the last month, with some differences across business contacts and households. Input prices continued to rise moderately for both services and manufacturing firms. However, reports on selling prices were mixed. Service firms noted modest growth in selling prices due to some ability to pass higher prices onto consumers, while selling prices declined slightly for manufacturers. Housing prices and rents grew modestly on average across the District over the last month, but varied widely across locations. Home prices expanded more slowly in western states like Colorado and New Mexico, where housing price growth had been faster in recent years. In contrast, housing prices grew more swiftly in midwestern states like Missouri and Kansas, where price growth had been relatively lower over the past couple of years. Rents followed a similar pattern, with muted rent growth in western metros like Denver and Albuquerque and faster rent growth in smaller midwestern metros like Wichita and Tulsa.
Consumer Spending
Growth in consumer spending slowed to a modest pace. Reports were generally mixed, even among businesses within narrow spending categories, with the exception that most contacts noted consumers were increasingly price sensitive. Many of the businesses that reported expanding activity attributed that growth to promotions, sales, or discounts. Meanwhile, many of the businesses that indicated declining consumer spending highlighted pullbacks in luxury or higher-end goods and services. For example, home remodeling activity slowed for large renovations and luxury improvements but picked up among smaller home maintenance and repair activity. Similarly, auto sales slowed for EVs and large SUVs that have higher price points but picked up slightly among smaller economy models that are more affordable.
Community Conditions
Contacts reported that the ability to remain connected to the internet became more challenging for low- and moderate-income (LMI) populations, exacerbated by the ending of the Affordable Connectivity Plan earlier this year. Organizations assisting in digital access said that many households have elected to maintain their internet connections through discounted plans offered by internet service providers (ISPs) or by reducing the plan quality. They noted uncertainty about how long households would maintain service amid other cost constraints and limited funds available from internet subsidies. Regarding ISPs discounted plans, contacts highlighted variability in the access and reliability across service areas. Furthermore, they noted some ISPs expressed concern about the financial sustainability of certain infrastructure projects aimed at improving internet access due to the loss of lower-income internet subscribers.
Manufacturing and Other Business Activity
The pace of decline in manufacturing activity accelerated to a moderate rate over the past month, led by robust declines in the production and sales of finished goods. Services businesses also reported declines in activity, but those declines were modest. Contacts across sectors reported a significant increase in the amount of time it takes to receive payments from customers as compared to the beginning of the year. Delayed payments were reported for customers of all sizes. Contacts indicated the increases in time to receive payments significantly increased financial stress for their business, but almost none of the contacts reported that greater delays in receiving payments resulted in slower hiring plans or capital outlays. Instead, contacts indicated they are adopting stricter cash management practices. Although financial stress rose among many businesses, the outlook for production activity and hiring were mostly unchanged and expectations were for current conditions to persist over the next six months.
Real Estate and Construction
Commercial real estate activity picked up recently. The volume of sales continued to grow modestly, and sales prices also rose after having been in decline for several months. Refinancing activity reportedly rose as well. Loan demand picked up in accordance with the increase in transaction activity, though borrowers continued to cite difficulties in accessing credit. Several contacts indicated operating expenses continued to rise at an outsized pace with multiple drivers. Property owners indicated prospective tenants are requesting more modifications resulting in modest increases in cost pressures. Insurance premiums and maintenance costs have reportedly continued to rise at a robust pace. Some contacts expected that construction and maintenance costs could reaccelerate in coming months.
Community and Regional Banking
Loan demand was mostly unchanged at District Banks over the last month, although several bankers indicated moderately stronger demand for residential mortgage loans. A larger proportion of respondents indicated overall loan quality deteriorated modestly, primarily for consumer lending. Expectations were reportedly for further, but mild, deterioration in credit quality over the next six months. Deposit levels remained stable, with some contact noting a shift toward certificates of deposit accounts due to the declining rate environment. The primary outlook for bank M&A activity among contacts was generally unchanged, though several bankers did note an anticipated increase in their outlook for M&A activity over the next twelve months.
Energy
Tenth District oil and gas activity fell moderately. While most contacts reported no change in activity, nearly a third reported declines in drilling activity. The few firms that reported higher activity were generally smaller operators. Drilling activity varied across the District, with slightly higher rig counts in Oklahoma and Wyoming but fewer rigs in Colorado. Revenues and profits declined somewhat as oil prices softened but remained in positive territory for the average District firm. Consequently, capital expenditures fell somewhat compared to last year. Natural gas prices increased recently, yet remain below profitable levels. Contacts reported the current low gas prices constrain or completely hinder drilling over the near term, but expectations are that drilling for natural gas will be profitable in a couple of years.
Agriculture
Activity in the agricultural sector within the Tenth District continued to decline at a moderate pace as crop prices remained weak. As activity slowed, farm lenders still reported increased loan demand driven by higher operating costs and living expenses. Agricultural lenders reported lower farm incomes and a slight decline in farm loan repayment rates during the most recent survey period. Deterioration in farm borrower liquidity and income was more pronounced in states most heavily concentrated in crop production. Financial conditions were more stable in areas most concentrated in cattle production as profit opportunities for cow/calf producers remained strong. Although contacts indicated slight declines in repayment rates and borrower liquidity, overall loan quality remained sound and farm real estate values held firm.
For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.