April 20, 2022
Summary of Economic Activity
Growth in the Tenth District economy accelerated to a robust pace over the last several weeks. Manufacturing production grew rapidly bringing overall activity to its highest level in fifteen years. Services sectors also grew at a robust pace. In particular, demand at leisure and hospitality businesses bounced back quickly as the Omicron wave faded, and spring break activity significantly exceeded expectations for most contacts. Real estate activity and demand for mortgages remained at exceptional levels, even as interest rates rose in recent weeks. Contacts reported the invasion of Ukraine further disrupted global supply chains and led to higher input prices, but has not affected overall demand, hiring plans or planned capital expenditures. Uncertainty about ongoing effects of disruptions in Ukraine is elevated in the agriculture and energy sectors. Labor markets continued to tighten. District states concentrated in agriculture and energy sectors had exceptionally high numbers of vacancies per job seeker. Prices increased at a robust pace across the District. Moreover, contacts indicated that they increased their prices more frequently over recent months.
Labor Markets
Total hiring grew at a moderate pace. While labor shortages remained challenging, some contacts reported an improvement in their ability to recruit or retain workers. Hiring in the services sector outpaced job growth among goods-producing businesses, driven largely by gains in leisure and hospitality employment. Labor markets continued to tighten across the District. The number of vacant jobs for each unemployed person was at all-time highs, and generally above the national average. States concentrated in agriculture and energy sectors had exceptionally high numbers of vacancies per job seeker, a trend that emerged as commodity prices rose in recent months.
Wage growth was robust and broad-based over the last month. Contacts reported that the pace of wage gains was relatively faster among lower-wage occupations, as measured on a percentage basis. The transportation sector also exhibited large wage gains. Contacts continued to report increasing non-wage benefits, such as more personal time off, in order to attract applicants. Expectations that wage growth would exceed its pace from recent years were unchanged.
Prices
Prices increased at a robust pace across the District. Moreover, contacts indicated that they increased their prices more frequently in recent months. Most businesses indicated that higher prices were insufficient to fully offset rising input costs. Businesses linked more closely to the production, processing or delivery of commodities exhibited greater ability to pass higher prices to their customers. Retail businesses and contacts in the agricultural sector noted that the costs of ongoing supply disruptions have yet to fully reach customers.
Consumer Spending
Consumer spending grew at a moderate pace in recent weeks. Contacts in the leisure and hospitality sector indicated that the spring season has been much better than expected as COVID-19 cases abated quickly, and that bookings extend throughout the summer. Moreover, several contacts noted that planned business travel grew moderately in recent weeks. Several retailers indicated that uncertainty about growth in consumer spending for the next several months is elevated, particularly for lower income households. Contacts noted that higher food and gasoline prices are expected to curb other retail spending as essential goods become more expensive.
Manufacturing and Other Business Activity
The manufacturing and services sectors in the District expanded at a robust pace in recent months, bringing reported activity well above levels exhibited over the past fifteen years. However, most contacts reported that profit margins decreased recently amid rising cost pressures. New orders among manufacturers outpaced growth in their inventories of materials, leading to rapid increases in backlogs. Expectations for growth over the next six months remained elevated broadly, but constrained by difficulties hiring workers and sourcing key inputs.
Contacts reported that the invasion of Ukraine further disrupted global supply chains and led to higher input prices, but has not affected overall demand, hiring plans or planned capital expenditures. The disruptions to supply chains due to the invasion were broad-based. For example, contacts in professional business service sectors highlighted losses in communication with Ukrainian software engineers supplying regional businesses. Also, deliveries of vehicles and other equipment to energy and manufacturing businesses have been delayed because key components fabricated in Ukraine were not available. Uncertainty remains elevated among District contacts about further disruptions tied to the conflict. Given Ukraine's prominence in supplying neon – a gas used in the manufacturing of microchips – several contacts noted exacerbated concerns about the availability of electronic equipment looking ahead. Uncertainty about future supply disruptions was also pronounced among agricultural contacts and steel manufacturers.
Growth in planned capital expenditures has not kept up with growth in overall production in recent months, expanding only at a modest pace. Several businesses highlighted cash flow constraints on investment activity. Strains in transportation prompted more suppliers to require upfront payment, rather than upon delivery. Alongside delays in production and sales, cash flows available for investment became less abundant.
Real Estate and Construction
Demand for construction of multifamily and single-family housing continued to grow at a robust pace. Development of single-family housing projects proceeded with most being completely pre-sold. New construction of multifamily housing faced challenges in securing financing as the repricing of both debt service costs and construction costs were occurring too rapidly to settle terms on lending. Housing markets remained extremely tight, with demand growth outpacing the inventory of new homes available for sale.
Community and Regional Banking
Loan demand grew moderately over the past month as banking contacts highlighted increased levels of commercial real estate financing. Demand for commercial and industrial loans and residential mortgages were stable amid rising interest rates. Credit quality was unchanged and contacts did not anticipate material changes going forward, although some noted concerns related to agricultural input costs and the effects of rising interest rates on borrowers. Deposits grew moderately from historically high levels. Several contacts noted near-term risks stemming from rising inflation, elevated home prices, increased labor costs, and considerable economic uncertainty.
Energy
Energy activity increased moderately across the Tenth District in recent weeks. Access to credit expanded in recent months, and most firms expected credit availability to expand further in the next six months. Higher crude oil and natural gas prices led regional firms to report higher profitability compared to late 2021, supporting access to credit. Prices rose significantly and production continued to rise. More oil and gas firms reported increasing jobs than at any time since 2014, and wages and benefits have also risen considerably. Several contacts also noted that rising prices for steel and the unavailability of piping inhibited production growth. The invasion of Ukraine, and a disruption to imports, further constrained the availability of pipe needed for drilling activities. Higher labor and materials costs led firms to report increases in the oil price levels necessary for a substantial increase in drilling to occur. Overall, the number of active rigs in the District increased slightly since February.
Agriculture
The Tenth District farm economy remained strong alongside elevated commodity prices, but volatility and uncertainty in global markets emerged as a risk for the sector. The price of wheat and corn increased rapidly, and soybean prices increased modestly in March as the conflict in Ukraine led to expectations of substantial disruptions in global production and trade activity. The turmoil also led to rapid increases in the price of major inputs such as fuel and agricultural fertilizers. While crop prices supported farm revenues, concerns about the cost and availability of agricultural inputs intensified, and higher feed prices could also pressure profit margins for livestock producers. In addition, the surging grain prices increased costs for food processing facilities in the District.
For more information about District economic conditions visit: www.KansasCityFed.org/research/regional-research