Federal Reserve Bank of Kansas City
Summary of Economic Activity
Economic activity expanded slightly in the Tenth District, led by consumer spending on both goods and services. Contacts indicated consumers are increasingly using longer-term financing and consolidating debt to manage household cash flows and support ongoing spending. Growth in consumer spending supported modest hiring activity concentrated in service sectors. Similarly, prices rose at a modest pace overall but rose faster among consumer-oriented businesses. Contacts broadly reported expectations that growth and hiring will accelerate in coming months, driven by faster consumer spending, growth in manufacturing demand and rising construction activity. Contacts also noted several risks to their favorable outlooks. Agriculture and leisure and hospitality businesses highlighted risks to their capacity that could arise from potential changes in immigration policy. Professional service sectors with large technology outlays expressed concerns about sourcing equipment amid potential tariffs and are already adjusting inventories.
Labor Markets
Employment levels grew slightly over the past month and business contacts expected faster job growth early in the new year. Recent hiring activity was concentrated in services sectors, and wages for service workers continued to grow at a moderate pace. While hiring and wage growth were subdued in manufacturing, contacts shared the favorable employment outlook. District firms reported limited reliance on immigrant labor in general, but contacts in select industries and regions expressed concerns that potential immigration policy changes could exacerbate already tight labor market conditions by limiting the supply of labor. Food manufacturing and agricultural contacts in Kansas and Nebraska indicated restrictions on temporary migrant labor could lead to significant supply constraints. Similarly, leisure and hospitality contacts in Colorado suggested immigration restrictions could exacerbate labor shortages in towns near resort communities. Technology industry contacts expressed additional concerns surrounding the ability to employ overseas technology workers if offshoring policies were to shift.
Prices
Prices continued to grow slowly over the last month, driven by consumer goods and services prices. Contacts noted automobile prices rose moderately due to the combination of rising costs of sourcing vehicles and pent-up demand. As consumers were holding onto their cars longer, dealers had to pay more to find and transport used car inventory. While recent price growth was slow overall, expectations for price growth over the next six month rose at a moderate pace. Faster input price growth was a noted driver of higher expected prices across goods and services for the coming year. In general, businesses were not able to pass along recent cost pressures but expressed plans to do so.
Consumer Spending
Consumer spending grew slightly over the last month, driven by growth in discretionary spending and auto purchases. Overall leisure and hospitality spending continued to rise, albeit with some signs of a softer outlook ahead. Casino operators in New Mexico reported fewer visits and lower spending per visit, and contacts at Oklahoma casinos indicated the outlook for 2025 is lower than the previous two years. Ski resort contacts noted busy early-season bookings and a sold-out holiday season. However, out-of-state powder hounds opted for lower cost basic passes to save on their ski vacations and locals were reportedly less likely to book lodging in advance, gambling that lower prices on vacant lodging would be available. While durable consumption contracted over the past month, auto purchases grew moderately driven by pent-up demand as many consumers made year-end vehicle purchases. Consumers reportedly took on long-term financing (often more than 72 months) to reduce monthly auto payments in an effort to manage household budget constraints.
Community Conditions
Contacts reported low- and moderate-income (LMI) consumers were struggling with increasing debt burdens. Most contacts said that they were seeing higher credit card utilization, increasing debt-to-income ratios, and delinquencies. Community development financial institutions contacts noted more clients were seeking consolidation loans due to higher debt burdens. Contacts indicated LMI populations continued to struggle with food and housing prices, as the ability to offset prices was limited due to higher earnings pushing households toward a benefits cliff with a potential loss in government benefits. One contact noted workers would need at least a 10 to 15 percent increase in wages to offset lost benefits but were only finding jobs with much smaller increases.
Manufacturing and Other Business Activity
Activity in service sectors grew moderately over the past month, largely driven by consumer-facing services rather than business services. Contacts shared that households within the region had some pent-up demand for purchases that were delayed due to economic concerns that subsided recently. Service firms continue to face pressure on profit margins as input prices rose faster than selling prices. Margin pressures were further exacerbated by higher overhead costs. Select business contacts reported robust growth in inventories in the past month for specific imported goods—such as computers, phones, and other electronic equipment, as well as certain industrial products—due to concerns over potentially higher costs from proposed import tariffs. The manufacturing sector continued experiencing a slight decline in activity. Nonetheless, manufacturing firms remained optimist, anticipating greater activity in the early part of next year driven by improvement in future production and new orders.
Real Estate and Construction
The level of construction activity was unchanged in recent months, however several contacts noted substantial shifts in the sources of construction demand. Municipal construction projects had been a key source of demand in recent years, but municipal development activity is waning as the availability of public funds and outlook for fiscal spending dwindle. Contacts indicated more private sector customers are coming to the table to satisfy pent-up demand from delayed development projects and deferred maintenance, offsetting the declines in municipal projects. In particular, contacts highlighted growth in demand for construction of healthcare facilities. Demand for single-family home building also firmed slightly, primarily in luxury segments or homes with large footprints. Overall expectations for construction activity were favorable for the next six months, with contacts indicating an outlook for modest growth.
Community and Regional Banking
Loan demand and credit standards were mostly unchanged across categories. However, the trend of lower demand for residential mortgage loans continued. Concerns related to credit performance over the next six months were less prevalent overall but shifted notably to different segments of the regional economy. Much of the improvement in the outlook around credit performance was due to concerns with commercial real estate loans being modified in the lower interest rate environment. In contrast, contacts reported more pessimism for agriculture loans, as grain prices remained low. Deposit levels were stable, though bankers noted a continued migration into certificate of deposit accounts and money market accounts, as customers took advantage of the current rate environment.
Energy
Tenth District oil and gas activity fell modestly. While most contacts reported no change in activity, approximately a quarter of businesses reported declines. The number of active oil rigs in the District fell slightly, while gas rig counts rose as natural gas prices now meet the average breakeven price reported by firms. Despite declining revenues and profits, District firms raised capital expenditures and employment substantially from this time last year. Firms expect drilling activity to pick up somewhat in the next six months but still do not expect material increases in production heading forward. Contacts reported the prices needed for a substantial increase in drilling remained higher than their long-term price expectations.
Agriculture
Agricultural economic conditions in the Tenth District remained subdued alongside weak crop prices. Soybean, wheat and cotton prices were nearly unchanged from the prior month and stayed below average breakeven levels. Corn prices also remained weak despite increasing slightly following recent reports of higher than anticipated export activity. Strong market conditions and high prices supported broad strength in the cattle industry, but incomes were dampened in some areas heavily affected by drought. Lenders in the District reported slight deterioration in farm loan repayment rates alongside weaker incomes, but many noted that balance sheet strength of recent years kept financial stress limited.
For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.