Beige Book Report: Kansas City
October 19, 2022
Summary of Economic Activity
Economic growth in the Tenth District was modest, though employment growth maintained momentum as prior job openings were filled. However, contacts highlighted several indications of cooling labor demand, including less willingness to replace workers who leave, less willingness to post new positions and a slight deceleration of wage growth from recent highs. More households reportedly turned to gig work or other contract work to supplement their income amid rising prices. Most businesses reported expectations that growth in cost pressures will persist, and also reported better ability to pass on those costs to customers. In healthcare, contacts suggested upcoming negotiations of reimbursement rates could lead to an acceleration of price growth for health services. Spending on leisure travel was robust, but overall consumer spending held steady over the past month. Manufacturing production growth continued to decelerate. Still, few businesses reported plans to reduce their production capacity or cancel existing expansion plans. Contacts expected energy markets to remain tight due to past periods of underinvestment, which drove increases in employment within the sector in several District states.
Labor Markets
Employers in the Tenth District continued to add jobs at a moderate pace during September, as momentum from past job openings kept hiring activity elevated. However, commentary from a broad set of contacts pointed to signs of cooling labor demand. For example, businesses in several industries reported they would be much less likely to backfill positions, if workers were to leave. Many other businesses reported that they do not plan to post new job openings in coming months, indicating uncertainty about the outlook in slowing planned hiring. Reports from residential real estate, venture capital and start-up sectors stood out as areas where worker layoffs were evident and labor demand was declining. Hardly any District businesses indicated they were hoarding excess labor.
Contacts reported expectations that wage growth is likely to slow to a moderate pace in coming months. Although wage growth is expected to slow from recent highs, most businesses indicated the increase in labor costs being budgeted for in the coming year remains well-above historical norms. Moreover, manufacturers indicated they continue to expect wage growth to exceed historical levels, even though overall demand growth has become more sluggish.
Prices
Prices continued to increase at a robust pace. Most businesses indicated an improved ability to pass on higher prices to customers over the past few months, particularly for hospitality and retail businesses. Most contacts expect cost pressures to remain persistent over the next six months, broadly citing financing, energy, labor and shipping and transportation costs. Additionally, contacts in healthcare noted an upside risk to persistent price pressures over the coming months stemming from upcoming healthcare contract renegotiations. As an exception, contacts expected cost pressures for building materials to further diminish over the coming months.
Consumer Spending
Household spending was mostly unchanged over the past month. Hoteliers in the District indicated that leisure travel grew solidly from already elevated levels, even as room prices picked up significantly across locations. Contacts in the hospitality sector indicated this past September was the best on record, although parts of Wyoming still felt the effects of heavy rains earlier in the summer that dampened leisure travel to the area. Car sales remained subdued across District states. While auto sales were previously held back by supply constraints, the primary headwind to sales shifted recently to rising interest rates.
Community Conditions
Several contacts reported a recent rise in the number of low- and moderate-income workers seeking non-traditional employment arrangements – gig work or other contract work. Reports were mixed on drivers. Many contacts suggested individuals are increasingly taking on multiple jobs via app-based work or have adopted "side- hustle" microbusinesses to augment their incomes amid rising household expenses. Alternatively, other reports indicated more people eschewed formal employment in pursuit of flexible work schedules. Access to affordable child care and reliable transportation have worsened recently due to inflationary pressures, particularly for low-to-moderate income households. Several contacts suggested gig work provided greater opportunities to remain engaged in the labor force.
Manufacturing and Other Business Activity
Manufacturing activity decelerated further over the past month, primarily due to declines among durable goods and fabricated materials manufacturers. Despite slowing growth in overall manufacturing activity, few contacts indicated any plans to reduce their production capacity in coming months. Most businesses reported they intend to follow through on any existing plans for market expansion or capital plans to increase their scale of production. Several contacts noted rising interest rates are weighing heavily on expected future capital expenditures, as some prospective projects no longer "pencil out." Activity among service businesses remained firm as contacts reported moderate growth through September. The majority of businesses in both service and manufacturing sectors indicated they did not hold excess inventories of production materials. Few contacts indicated they plan to expand their inventories in coming months, as they seem "right-sized" or somewhat too large given their current outlook.
Real Estate and Construction
Single family housing construction declined at a moderate pace, compounding previous declines, which contacts attributed to higher interest rates. Existing home sales and brokerage activity also fell swiftly. In contrast, the new development, new construction and level of transaction activity for multifamily housing all continued to grow at a solid pace across the District. Contacts indicated that housing shortages are driving persistent rental price pressures, and suggested that excess demand for multifamily housing construction will persist over the medium term. Several contacts noted that building material prices eased in recent months, further supporting ongoing construction in multifamily housing projects.
Community and Regional Banking
Loan demand weakened modestly in the past month amidst rising economic uncertainty and borrowing costs. Bankers noted particular weakness in demand for commercial and industrial Ioans and commercial real estate loans, as businesses pared back their borrowing in the face of economic headwinds. Credit quality remained unchanged, but contacts continued to expect deterioration over the next six months against the backdrop of inflation and higher repayment costs. Deposit balances declined due to rate competition and investment opportunities outside depository institutions.
Energy
Tenth District energy activity expanded at a moderate pace. Business contacts reported an expansion in drilling activity, revenues, and profits. Additionally, energy businesses continued to hire and expressed an ongoing willingness to grow their work force in coming months. However, filling open positions remained challenging, especially for skilled labor. Contacts continued to express optimism around prospects for their businesses, anticipating that energy markets will remain tight due to past underinvestment within the oil and gas sector. Cost pressures remain an issue, although input costs are increasing at a slower pace than earlier this year. Higher costs of capital, labor, and equipment drove a robust increase in the reported energy commodity prices needed to meaningfully expand drilling activity. Similarly, the prices for upstream oilfield services firms rose moderately. Despite these persistent cost pressures, most contacts reported a willingness to add additional capital expenditures and expand their businesses amidst still elevated energy prices.
Agriculture
Financial conditions remained strong due to still elevated crop prices. However, contacts reported several adverse developments tied to drought and input costs. At the start of the fall harvest season, nearly one-third of corn and soybean crops were in very poor condition in some District states, heightening concerns about reduced yields. Exceptionally dry conditions also contributed to lower river levels, higher transportation costs, and lower crop prices in some areas in September. In the livestock sector, hog prices declined moderately over the past month, but remained slightly above year-ago levels. Cattle prices continued to increase alongside reports of additional herd liquidations, due, in large part, to higher feed and transportation costs.
For more information about District economic conditions visit: www.KansasCityFed.org/research/regional-research