July 12, 2023
Summary of Economic Activity
The level of economic activity across the Tenth District changed little during June, with a mix in performance across segments. Although hiring remained flat generally, expected employment levels at most businesses continued to point downward. Businesses predominantly reported relying on natural turnover and attrition to reduce their headcounts, rather than layoffs. Consumer spending rose, but at a more moderate pace after surging in recent months. Homeowners in several District states indicated that recent changes to tax assessments of their homes increased their monthly housing expenses, which could persistently impair their ability to spend on more discretionary items. Concerns about the adverse effects of higher financing costs on credit quality were pervasive, spanning consumer segments, commercial real estate, and small businesses. Energy activity in the District decreased significantly as weak oil and gas prices continued to squeeze profitability. Oil and gas contacts noted that capital expenditures are down from this time last year and further declines are expected, despite steady access to credit. Expectations that dry conditions will reduce crop yields pushed several commodity prices higher, but contacts noted that lower production could still limit revenues for many producers.
Labor Markets
Labor conditions remained mostly unchanged in the Tenth District during June, with noticeable differences across sectors. Manufacturing contacts reported modest declines in employment amid slowing orders and weakening demand. In contrast, services contacts reported a slight increase in hiring driven by steady consumer spending. Despite the more sluggish pace of hiring recently, wages continued to grow moderately driven largely by still-tight labor conditions for services firms.
Although the level of hiring was mostly unchanged, expectations for job growth and labor utilization over the next 6 months continued to soften. In fact, contacts generally expected a slight decline in their employment levels over the coming months and are reportedly already reducing hours worked. When asked, the overwhelming majority of contacts indicated they are not yet planning to layoff workers to reach a lower headcount. Instead, they indicated plans to post fewer positions and pause hiring activity in lieu of laying off employees. For example, one contact expressed that "pausing hiring now and relying on attrition helps to avoid harder decisions later."
Prices
The pace of price growth was mixed across the regional economy. Manufacturing contacts reported prices grew at a slight pace, continuing to moderate from historically high growth. Most non-durable manufacturers even reported declines in prices for finished products. But services businesses reported steady price growth at a moderate pace for inputs and selling prices, and some expansion of profit margins. Particularly, retail trade and leisure and hospitality businesses demonstrated improved ability to pass price increases to customers. Most businesses expected prices to continue to increase moderately over the next six months.
Consumer Spending
Following a surge in spending in recent months, the pace of spending growth slowed to a moderate pace in June. Contacts at restaurants and retail establishments reported ongoing strength, but consumers were reportedly much more sensitive to hotel rates in recent weeks. Several contacts noted a pickup in business travel during the weekdays partially offset the moderate decline in weekend hotel stays by leisure travelers, and that occupancy declined last month after rising steadily for over a year. Auto purchases remained subdued in most District states.
Community Conditions
Small and micro businesses continued to experience financial difficulties due to the rising cost of inputs and hiring constraints. Contacts reported recent financial challenges caused them to increasingly access non-traditional forms of credit with higher interest rates, such as credit cards and online lending platforms. Moreover, a growing number of businesses reported paying only their minimum credit card payment, or missing payments completely, which has negatively impacted their credit reports. While distressed financial conditions limited access to loans from traditional lenders, community development financial institutions reported strength in the ability to provide loans with rates below 10% for qualified borrowers.
Manufacturing and Other Business Activity
Manufacturing activity declined at a moderate pace, but service contacts reported a moderate increase in activity. Manufacturing contacts reported broad based declines, including reduced order demand and shorter order backlogs. Furthermore, manufacturing contacts expect business conditions will soften in coming months, noting continued weakening in order back logs and a further deterioration in demand. Despite softening in business conditions for manufacturing firms, business contacts expressed a continued willingness invest through capital improvement projects, albeit at a much slower pace than a year ago. Service contacts generally indicated much healthier business conditions with a moderate expansion in the demand for their services. Despite current favorable business conditions, service contacts expect a softening in activity in the coming months driven by expectations for weaking demand. Contacts in advertising and marketing were an exception, already feeling a stark pullback in customer demand. Moreover, advertising contacts indicated the onset of AI was accelerating the declines in demand for out-of-house service providers.
Real Estate and Construction
Several home builders indicated activity picked up over the past couple of months. Construction was supported both by promotional deals offered by builders that mitigated the effects of higher mortgage rates and by a stabilization in the costs of building materials. Some contacts suggested that slowing commercial real estate construction could further boost growth in the supply of housing over coming months because workers may be more available and materials prices somewhat lower. Homeowners in several District states indicated recent changes to tax assessments of their homes increased monthly expenses, which may persistently impair their spending power.
Community and Regional Banking
Contacts' views on loan demand were mixed across the District last month, but concerns about the effects of rising credit costs, particularly on consumer loan types, were ubiquitous. Contacts also noted concerns for commercial real estate (CRE) credit quality, particularly credits backed by office properties, and expected credit quality to worsen across all loan types over the next six months. Credit standards remained unchanged, though some respondents highlighted reduced risk appetite for CRE deals. Deposit balances declined in June as customers moved to competitors offering higher yields or invested in U.S. Treasuries after the resolution of the debt ceiling. Deposit insurance coverage and the desire for diversification also drove movement of large customer balances and contributed to continued tightening in banking system liquidity.
Energy
Tenth District energy activity declined moderately last month. The number of active rigs decreased significantly as weak oil and gas prices continued to squeeze profitability. District firms reported a substantial decline in revenues, profits, and supplier delivery times since the last report. Profits and supplier delivery times are expected to continue declining over the next six months. Accordingly, District firms anticipate further reduction in activity in the near term. The average price needed for a substantial increase in drilling to occur remains above long-term price expectations for oil and gas, indicating that future production growth may be constrained for a while. Contacts noted that capital expenditures are down from this time last year and further declines were expected, despite steady access to credit.
Agriculture
Agricultural economic conditions in the Tenth District were steady through June. The price of most major commodities increased moderately from the previous month as drought intensified in many major crop production areas across the nation. Expectations for dry conditions to reduce yields pushed prices higher, but lower production could limit revenues for some producers. Through mid-June, an average of about 15% of corn and soybean acres and nearly 30% of winter wheat acres were in poor or very poor condition across all District states. Dry weather also continued to limit grass and feed supplies, resulting in higher costs for many cattle producers. Despite concerns about the potential for reduced profitability ahead, agricultural lenders continued to report strong credit conditions.
For more information about District economic conditions visit: https://www.kansascityfed.org/research/regional-research/