Beige Book Report: Kansas City
September 7, 2022
Summary of Economic Activity
The Tenth District economy expanded slightly, with much of the growth in business sales and revenue being driven by higher prices rather than a greater volume of activity. Consumer spending was mostly unchanged. Yet, more households began to report difficulty in meeting regular expenses, and delinquencies on utility payments picked up slightly. Amid high levels of overall production, new orders and backlogs at manufacturers declined modestly, indicating some softening of overall demand. Job growth was constrained by difficulties in attracting applicants. Many contacts indicated that worker turnover declined moderately, and that they were better able to retain high quality workers in recent months. Many businesses reported that they raised worker compensation mid-year in response to high inflation. Prices in the District rose broadly at a robust pace. Lags in the ability to fully pass-through costs led most contacts to report declining margins. Housing rental rates also increased in recent months. Several contacts pointed to an increased prevalence of property investors in both rural and metro rental markets contributing to rental cost pressures.
Labor Markets
Employment grew at a moderate pace in the Tenth District, as the overwhelming majority of contacts expressed difficulty in filling newly opened positions. Most businesses pointed to low numbers of applicants, or qualified applicants, as the primary challenge to recruiting. Many contacts also highlighted difficulty in meeting workers' expectations regarding compensation. Worker turnover declined moderately across industries and across District states. Many businesses noted that they have been better able to retain higher quality workers in recent months, although retention continues to be a challenge. Expectations for hiring over the next six months declined modestly as some businesses indicated they do not plan to add to their workforce for the remainder of the year.
Contacts reported broadly they made mid-year adjustments to worker compensation that were tied directly to inflation pressures. Nearly all contacts reported wage increases. In addition, many businesses also made one-time bonus payments, added flexibility in work schedules, or adjusted the benefits they offer. Looking ahead, contacts were mixed on whether further changes to wages or other compensation will be needed before the end of the year. Most contacts expressed they would be more likely to continue inflation-related bonus payments.
Prices
Prices continued to grow at a robust pace. Most contacts reported a slight slowing of input price growth from recent highs, particularly for commodity-related materials. In contrast to the past year, where supply chain disruptions led to outsized increases in input costs for particular products, several contacts noted that input cost pressures are now more broad-based and incremental. Businesses' ability to pass price increases to customers improved moderately. On balance, though, most businesses indicated that price margins declined further as higher selling prices continued to be insufficient to fully offset higher materials costs and rising labor costs.
Consumer Spending
Total consumer spending changed little over recent months. However, several contacts noted sales revenues were supported by higher prices, as quantities sold fell slightly. For example, even restaurants with lower price points commented the number of transactions was lower over the last month. Although consumer delinquencies on credit cards and mortgages remained subdued, more households began to express difficulty in meeting regular expenses as prices rose. Delinquencies on household utility bills picked up slightly.
Community Conditions
Housing affordability challenges for both renters and owners grew moderately in both rural and metro areas, particularly for low and moderate income (LMI) households. Contacts in several District states pointed to pressures on rental housing prices resulting from increases in investor purchases of local homes. Some investors have been reportedly less willing to accept vouchers or less willing to negotiate rents. Although purchase prices of single-family homes moderated somewhat, contacts reported that rising interest rates have pushed many prospective LMI buyers out of the market. Eviction cases increased in recent months. For example, a record number of eviction cases were filed in the Oklahoma County District Court in July and August. Funds from assistance programs for preventing evictions and foreclosures diminished recently.
Manufacturing and Other Business Activity
Revenues at manufacturing firms expanded slightly, primarily due to robust growth in prices with slight decreases in production. Inventories grew mildly. Manufacturing contacts reported modest declines in a number of forward-looking indicators, such as new orders and order backlogs, which point to a tempering of otherwise high levels of demand. Services business contacts, both professional-oriented and consumer-facing, reported moderate growth in revenues but only modest increases on overall activity. Contacts also noted persistent supply chain disruptions continue to hamper growth. In line with softening demand, expectations for future activity over the next six months and planned capital expenditures eased slightly.
Real Estate and Construction
Growth in non-residential real estate activity expanded at a moderate pace. While office vacancies remained elevated, demand for industrial space grew rapidly, and occupancy of retail spaces continued to expand at a moderate pace. Planned development for industrial sites expanded at a robust pace in several states. However, contacts expressed mixed views regarding future development and building activity for commercial properties. As financial conditions continued to tighten, several contacts noted that they were able to adjust terms and covenants, and to continue with planned construction. Other contacts indicated that persistently high materials costs and labor shortages are inhibiting further new development of large commercial projects.
Community and Regional Banking
Loan demand weakened modestly in the past month as rising interest rates and heightened economic uncertainty adversely affected borrower demand. Contacts noted that credit standards remained unchanged and credit quality was stable, with low past due and problem asset levels. Deposits were stable across community and regional banks in the District, but several contacts noted that competition for deposits intensified as rates rose further. Bankers largely expected credit quality to remain stable over the next six months, but concerns were noted regarding rising inflation and the prospect of a recession.
Energy
Tenth District energy activity was roughly unchanged over the last month, with notable differences across segments of the energy sector. The overall number of newly drilled wells and well completions were steady on net over the last month. Declines in oil prices led to a slight reduction in total active oil drilling rigs in the District. Offsetting those declines, robust increases in natural gas prices contributed to moderate increases in the number of rigs targeted towards natural gas production. Contacts noted that surging natural gas prices were driven by confluence of low inventories, high summer demand amidst historic heat waves, and rising exports. Coal producers also saw a slight uptick in production, due to persistently high demand from electricity generation and elevated coal prices.
Agriculture
Conditions for the Tenth District's farm economy remained favorable, supported by the overall strength in commodity prices, despite elevated volatility in certain markets in recent months. Crop prices remained generally higher than a year ago, but were lower in August compared to earlier in the summer. Specifically, corn and wheat prices declined moderately, and soybean prices also dropped slightly during the past month. Heightened production costs and adverse growing conditions were worse than the national average in some District states over the past month. Several farmers noted that, even with elevated levels of revenue expected this year, net income levels would likely be more subdued. In the livestock sector, profit opportunities remained sound as cattle prices were slightly higher than the previous reporting period and hog prices increased notably.
For more information about District economic conditions visit: www.KansasCityFed.org/research/regional-research