Beige Book Report: Kansas City
May 31, 2023
Summary of Economic Activity
Total economic activity across the Tenth District changed little during May. Consumer spending at restaurants and for travel picked up in recent weeks, but most contacts did not expect the surge in spending to persist into coming months. Job growth continued to slow. However, the number of job openings remained elevated as businesses indicated they recently became more selective among potential candidates. Worker retention improved substantially, supporting the more cautious recruiting practices among businesses. Prices rose at a moderate pace. Growth in housing rental rates remained elevated in several western District states, but the pace of increases declined broadly and swiftly from the growth rate experienced during the past year. Although many businesses indicated some persistence in their ability to pass on higher costs, they also reported slower expected growth in costs ahead. Corn and soybean prices declined slightly since April based on reports of ideal planting conditions throughout most states and early projections that production could hit record levels due to historically strong yields. Banking customers continued to diversify account balances among multiple banking institutions. Overall, deposit levels remained stable across the District, with continued rotation of balances toward time deposits.
Labor Markets
Although the overall pace of hiring in the Tenth District continued to be modest, most businesses indicated they had just as many, or more, job openings over the past month as they did at the beginning of the year. Contacts indicated they became much more selective in their hiring recently even as the number of applicants increased, partly explaining the disparity between the number of jobs posted and the level of hiring. Contacts reported that worker retention improved further in recent weeks. Several businesses also noted that competition for talent from businesses in different industries became less prevalent recently. Most businesses indicated that some of the slowness in hiring activity was also due to ongoing labor shortages, particularly for skilled workers in jobs with limited education requirements.
Although businesses reported ongoing wage pressures, most contacts indicated they expect the pace of wage growth to slow further during the second half of the year. The reported expectations of moderate wage growth in coming months were a marked downshift compared to the beginning of the year, when businesses had indicated they expected robust wage growth at the same levels they experienced last year.
Prices
Prices continued to rise moderately across the District. Businesses were mixed in their ability to pass along higher costs to their customers. Regardless, the pace of input price growth slowed broadly, suggesting easing cost pressures. Accordingly, most businesses indicated that price increases for finished products will likely soften over the coming year. Housing rents rose at a moderate pace generally, increasing somewhat faster in western District states. However, rents were growing much more slowly across the District than the accelerated pace witnessed over the previous year. "Since peaking in September of last year, growth in rental rates is returning to the pre-pandemic trend," one contact reported.
Consumer Spending
Consumer spending at restaurants, in hotels and at entertainment venues rose at a robust pace in several District cities over the past month. Some of this surge in spending was tied to success of certain professional sports teams, which led to inbound travel and activity for post-season games and for a highly attended player draft event. Notably, both hotel occupancy and daily rates picked up recently. However, several contacts reported that spending for personal care services continued to decline at a moderate pace.
Community Conditions
Organizations serving low-to-moderate income (LMI) communities reported increased demand for their services compared to six months ago. The growth in demand was noted across food assistance, housing assistance, and care economy segments of the non-profit space. As consumer prices have increased, organizations noted clients were more likely to be experiencing depleted savings and high credit card utilization, suggesting LMI populations are struggling to accommodate the recent growth in the costs of living. Non-profit leaders indicated they anticipate adverse effects of tightening credit availability on the communities they serve over coming months.
Manufacturing and Other Business Activity
Manufacturing contacts reported little change in overall production volumes. However, most contacts indicated the number of new orders and the length of their production backlogs declined modestly over the past month. In characterizing the downshift in new orders, one contact stated, "things are slowing, but no cliff in demand seems to be coming." Certain premium and specialty manufacturing activities, namely high-tech manufacturing and agricultural equipment production, reported ongoing strength in demand. The majority of contacts at manufacturing businesses indicated little difficulty in securing financing for their operations and planned capital expenditures. Services contacts broadly reported a moderate increase in business activity, with leisure and hospitality and health care establishments indicating especially strong sales growth over the past month. Although activity among services businesses picked up, expectations for growth over the next six months declined modestly. Some contacts at services businesses suggested access to credit slightly worsened over the last few weeks, primarily for funding large capital spending projects, but most businesses reported no change in their access to financing.
Real Estate and Construction
Several contacts in commercial real estate reported worsening conditions associated with higher refinancing costs over the past month. Heightened requirements for additional equity to reduce loan-to-value ratios were making refinancing deals difficult to close. Challenges in valuing properties reportedly exacerbated headwinds for refinancing activity. Some office property managers indicated assessing tenet quality became more difficult because the large companies that are historically stable renters have become more footloose, asking for shorter lease terms, or are reducing their demand for space altogether.
Community and Regional Banking
Loan demand weakened modestly in the past month as higher interest rates and the uncertain economic environment deterred loan growth, particularly for commercial real estate. Contacts expected loan demand to remain at current levels over the next six months. Rate pressures remained elevated in the deposit market. Customers continued to diversify account balances among multiple banking institutions in response to volatility in the banking industry. Overall, deposit levels were stable across the District during the past month, with continued rotation of balances toward time deposits. Given that funding costs are growing faster than new loan growth, net interest margins were projected to compress. Credit standards remained unchanged, and contacts noted stable credit quality and low past-due levels. However, contacts expected credit standards to tighten somewhat further due to concerns about future deterioration in asset quality, as higher borrowing costs adversely affect repayment capacity.
Energy
Energy activity declined slightly over the last month. Though oil production increased slightly, and natural gas production stayed flat, District rig counts declined in the face of depressed price levels. Still, there was some divergence among District states. The number of active rig counts held steady in New Mexico and Colorado but fell moderately in both Oklahoma and Wyoming. Furthermore, as an additional sign of slowing energy activity, the number of drilled but uncompleted wells continued to increase in the District and contacts expect an additional reduction in well completions going forward. Lastly, while access to credit is generally not an issue for most energy firms, companies with a heavy concentration in natural gas have seen tightening credit conditions due to sustained lower natural gas prices.
Agriculture
Conditions in the Tenth District agricultural economy remained strong through early May but showed signs of moderating. Corn and soybean prices declined slightly since April and were moderately lower than a year ago. Prices moved down recently based on reports of ideal planting conditions throughout most states and early projections that production could hit record levels due to historically strong yields. Wheat prices increased slightly since April, but poor yields caused by drought could limit revenues, particularly in Kansas and Oklahoma. Profits among cattle producers continued to be pressured by high feed costs and drought that damaged pasture conditions throughout the region.
For more information about District economic conditions visit: https://www.kansascityfed.org/research/regional-research/