Beige Book Report: Kansas City
April 19, 2023
Summary of Economic Activity
Total economic activity across the Tenth District declined slightly in March and April. However, almost every business contact reported no pull back in planned capital expenditures, hiring plans or planned wage increases in response to recent financial market volatility. Hiring activity slowed, leaving total District employment mostly unchanged. Worker retention was reportedly much higher, even as wage growth slowed. Consumer spending declined slightly. Households pulled back most on bigger ticket items like cars or home maintenance and improvements. Prices continued to rise at a moderate pace. Several food manufacturers indicated they do not expect to be able to negotiate the same pace of price increases as they did over the past year in the coming months. Deposit outflows at community and regional banking organizations raised funding challenges for many organizations in recent weeks. However, community development financial institutions, which typically serve microbusinesses and low-to-moderate income borrowers, reported stable funding conditions despite recent financial volatility. Agricultural lenders also indicated stable liquidity to support lending over the medium term. Generally, lenders expected somewhat tighter lending standards and stricter pricing related to credit risks in coming months.
Labor Markets
Manufacturing employment in the Tenth District increased modestly in recent weeks, which contacts tied to a better ability to recruit for open positions rather than an increase in overall demand for workers. Restaurant owners, hotel operators and most service businesses indicated that employment changed little over the past month. Although employment in healthcare grew at a moderate pace over the last month, labor demand at healthcare establishments slowed moderately in some parts of the District. Job losses in tech occupations were concentrated among larger companies operating in the region. Contacts noted that tech workers were finding new employment opportunities within a couple of weeks on average, but often at somewhat lower pay. Expected employment growth was reportedly much lower than just a few months ago.
Across industries and geographies, contacts reported that wage growth is slowing significantly compared to last year, and that mid-cycle wage increases are much less likely this year. Despite slowing wage growth, most businesses indicated that worker retention improved in recent weeks. Most contacts characterized expected wage growth over the near term as being above growth rates expected over the long term.
Prices
Prices rose moderately across the District. Services contacts reported selling prices grew only slightly. Yet, most contacts at services businesses anticipate changing their prices more frequently compared to the previous year, taking opportunities to raise prices incrementally when available. Most businesses said their recent difficulty with passing cost increases through to customers compressed their profit margins, with most indicating they expect to increase prices further over the medium term to rebuild lost profitability. One notable exception was processed food categories, where contacts do not expect to be able to negotiate as large, or as many, price increases with grocers as they did last year.
Consumer Spending
Household spending continued to fall slightly in recent weeks. Purchases of larger ticket items, such as cars or spending on home construction projects, declined significantly. Offsetting those declines were robust spending growth at restaurants and a rebound in leisure travel activity. Several contacts noted in-store retail spending growth picked up slightly, but also highlighted that the distinction between brick-and-mortar and online sales is less important as most establishments have developed some sort of online sales platform.
Community Conditions
Community Development Financial Institutions (CDFIs) across the District reported they have generally not experienced adverse effects resulting from the recent volatility in the banking sector so far. Most contacts reported their banking relationships were strong, with some banks proactively reaching out to quell any concerns about funding commitments. CDFIs expect strong and increasing loan demand as an alternative and competitive lender to commercial banks, especially as banks tighten credit. Looking ahead, several CDFIs reported concerns about the ability of businesses to pay on loans, especially as more Economic Impact Disaster Loan payment deferments continue to expire throughout the year.
Manufacturing and Other Business Activity
Manufacturing activity was unchanged from recent months while activity at services businesses declined slightly. In response to recent financial volatility, almost every contact reported they quickly assessed their distribution of bank deposits; however, most business contacts reported no pull back in capex plans, hiring plans or planned wage increases resulting from recent events. Expectations of production and sales over the next six months were little changed, except in technology sectors where business activity is expected to decline moderately.
In contrast, District contacts in the venture capital and start-up space reported a much more adverse outlook compared to just a couple of months ago as a direct result of the closure and challenges among the key lenders to the sector. Businesses tended to point to prolonged declines expected for the start-up ecosystem, rather than declines in certain segments of the startup community, such as life/bio sciences or tech services.
Real Estate and Construction
Vacancy rates at commercial properties increased moderately in recent weeks, most notably at office properties. Yet, contacts indicated use of warehousing and distribution space, which had been the strongest property segment over the last year, declined over the past month. Several contacts noted subleasing prices declined further. Following the recent financial market volatility, most contacts noted that lending for commercial real estate development is almost completely unavailable. From the lender side, one contact commented "we'd already been focusing only on premium deals, but now we are being even stricter about what 'premium' means."
Community and Regional Banking
After tightening credit standards over the past several weeks, many contacts reported expectations for further tightening or more strict pricing related to credit risks. Loan demand also weakened modestly in the past month, driven by increased borrowing costs and economic uncertainty. Most notably, contacts reported weaker demand in commercial real estate and commercial and industrial loans, though declines were broad-based. Credit quality remained stable, but contacts continued to expect loan quality to deteriorate over the next six months. Deposit levels declined moderately as large depositors withdrew uninsured balances amid the volatility in the regional banking sector and ongoing intensity of rate competition.
Energy
Tenth District energy activity declined moderately over recent months. The number of active gas rigs in the District decreased as natural gas prices continued to decline below profitable levels, and prices were expected to remain in an unprofitable range over coming months. However, declines in the number of active oil rigs were modest, as firms expect oil prices to remain in a profitable range in the near term, albeit with profitability falling in recent months. In line with these expectations, oil producers reported access to credit over the last month remained unchanged despite banking disruptions. The average price needed for a substantial increase in drilling to occur remains above near-term oil and gas price expectations, constraining future production growth. Most business contacts reported higher cost pressures across several key inputs and anticipate persistent cost pressures in the coming year. Accordingly, capital spending growth slowed relative to last year and is expected to decline over the next six months.
Agriculture
Agricultural economic and credit conditions in the Tenth District were reportedly strong. Elevated commodity prices continued to support profit opportunities for many producers. Farm loan repayment rates improved at a gradual pace in the first quarter and indicators of credit challenges were limited. Agricultural bankers throughout the region also reported that their liquidity was adequate to meet current credit demand and deposit withdrawals. The impact of higher interest rates on borrower finances and farmland markets was reportedly a growing concern. More broadly, drought and elevated production costs continued to affect many areas of the region.
For more information about District economic conditions visit: https://www.kansascityfed.org/research/regional-research/