January 18, 2023
Summary of Economic Activity
Economic activity in the Tenth District continued to decline slightly through the end of 2022. Hiring activity slowed further, but the labor market remained very tight. Several segments of the service sector had modest declines in employment, but job openings remained elevated. Given the ongoing tightness in the labor market, wage pressures remained high overall, and businesses noted that wage growth still has momentum. Manufacturing activity continued to decline at a modest pace, but expectations firmed somewhat. Consumer spending declined recently, particularly at retailers and restaurants. Given the amount of leisure travel, contacts noted that retail spending was lower than expected. Additionally, retailers indicated they are dealing with a glut of inventories resulting from loosening supply bottlenecks. Those previously delayed retail goods now in inventories are reportedly not well aligned with current consumer demand, and so are being sold at steep discounts. Cost pressures for service businesses remained elevated, but the pass through to customers became more difficult recently. Across goods and services, price growth slowed to a moderate, yet still-brisk, pace. Growth in overall energy activity slowed across the District, as falling oil and gas prices were a headwind to new drilling and production.
Labor Markets
Hiring continued to slow in the Tenth District as labor demand cooled, though the number of job openings and overall tightness of the labor market remained high. Employment remained mostly unchanged for manufacturing businesses, while employers in the service sector reduced their payrolls slightly. Reductions in employment were broad-based across service sectors but varied in scale across segments. Many restaurants and retail businesses reported modest declines in jobs, while a small number of technology and financial service businesses reported more substantial job losses. More contacts reported they reduced hours worked by employees in recent weeks, another indication of cooling labor demand.
While hiring slowed, wages grew moderately. District contacts broadly indicated that wage growth continues to have momentum due to ongoing imbalances in the labor market. In particular, wage growth in the lodging sector, where employment shortfalls remain pronounced, increased robustly. Most contacts reported they expect wages to increase at either the same rate, or a pace that is slightly faster, than wage growth over the past year.
Prices
Prices increased at a moderate pace. Most manufacturing businesses reported that input price growth continued to slow in recent weeks, and most of those contacts reported that they are able to pass over 80 percent of higher costs to their customers. Conversely, businesses in the services sector indicated input price growth remains elevated, and less than 20 percent of cost growth is passed to consumers. Service businesses noted they are struggling to strike a balance between retaining customers and maintaining profitability. Most contacts report that their expectations for future price growth are moderating compared to last year but remain elevated above historical norms.
Consumer Spending
Consumer spending fell moderately over the past month, despite robust leisure travel activity. Restauranteurs and retailers reported that "travelers just aren't spending like they used to." The lower propensity for travelers to dine out or shop, combined with adverse weather events and waning demand more broadly, led contacts to report a softer-than-expected beginning of the winter season. Travel and accommodation spending was elevated, driven by higher prices rather than higher volumes, as total occupancy remained subdued.
Community Conditions
Many non-profit organizations reported expanding their capacity recently in response to higher levels of household financial stress and food insecurity over the past year. One food bank in Kansas City reported that the number of sack lunches they provided tripled in 2022, with similar reports of heightened demand in other District cities. However, food bank contacts noted the increases in food and fuel costs earlier in the year coincided with declining donations, which depleted financial reserves and inhibited their ability to provide services in recent months. Difficulty meeting an increased demand for services was broad-based in the non-profit sector, with many organizations also citing difficulty recruiting volunteers and the health of their employees as major challenges to their operations.
Manufacturing and Other Business Activity
Manufacturing activity declined modestly with production levels, the length of backlogs and the volume of new orders all continuing to fall over the past few weeks. Changes in service sector business activity were mixed across segments. Sales were down broadly, however, tourism businesses noted sales growth remained moderate due to ongoing price growth. Although overall activity softened over the past few weeks, expectations for growth over the next 6 months increased moderately.
Demand for goods at retail businesses fell slightly. The lower demand coincided with a glut in inventories after shipping bottlenecks loosened. Retailers reported they are now dealing with a mismatch between final goods held in inventories and the type of goods consumers are demanding, forcing businesses to heavily discount misaligned merchandise. Although international freight conditions have reportedly recovered, broad disruptions across various modes of inland domestic transportation remain.
Real Estate and Construction
Subleasing activity in commercial real estate increased rapidly in recent weeks. Commercial space previously occupied by tech sector businesses became increasingly available. Contacts reported they expect further acceleration in the amount of office space that will be offered on secondary markets in coming months. Accordingly, prices of subleased space dropped, and terms became more favorable for incoming tenants. In residential real estate, builders of new single-family homes noted an uptick in the number of buyer cancellations for projects underway. In recent weeks, those cancelled purchases were backfilled by secondary buyers seeking homes. However, contacts indicated they expect "a bigger cliff of cancellations will hit builders in the spring."
Community and Regional Banking
Loan demand remained stable in the past month, except for residential mortgages, which continued to decline swiftly. Bankers experienced steady interest from borrowers across the Commercial and Industrial and Commercial Real Estate segments of their loan portfolios, despite higher interest rates on new originations. Although credit quality remained stable in recent weeks, contacts expected deterioration in the next six months as higher interest rates impair property valuations and borrowers' ability to generate sufficient cash flow for debt service, particularly in the CRE space. Deposits declined moderately this month as competitive rate pressures and inflationary dynamics eroded deposit balances. Nonbank financial institutions and firms with reduced liquidity drove deposit rates higher over the month.
Energy
Growth in overall energy activity slowed modestly in the Tenth District, as falling oil and gas prices were a headwind to new drilling and production. Contacts in the service segments of the sector reported little change in business activity. Despite several notable developments during the past month – in particular, G7 price caps and European sanctions on Russian oil exports and production cuts by OPEC – the overwhelming majority of contacts reported no changes to their production plans resulting from these events thus far. Looking ahead to later this year, most businesses indicated they expect oil and gas production to increase by less than 5 percent, as they expected prices to be slightly below levels necessary for more significant production increases. Several contacts also noted that ongoing delays in industry supply chains are expected to constrain production growth in 2023.
Agriculture
Agricultural economic conditions in the Tenth District were generally strong through the end of 2022 alongside elevated commodity prices. Prices of some key crops and livestock declined slightly during December but remained at a profitable level. Most contacts in the District reported gradual improvement in farm income and credit conditions, but others noted that drought had weakened conditions for some producers. Strong real estate values continued to bolster farm finances, but increased interest rates, high production costs, challenging weather conditions, and the outlook for commodity prices remained key concerns.
For more information about District economic conditions visit: https://www.kansascityfed.org/research/regional-research/