January 14, 2026
Summary of Economic Activity
Economic activity increased slightly, reflecting gains in service sector sales and manufacturing orders. Labor markets improved, with turnover easing, labor productivity improving, and continued high labor absorption. Prices rose modestly, driven by uneven but persistent input and labor cost pressures which firms are partially passing through. Consumer spending edged higher, though leisure and hospitality softened amid cautious discretionary behavior. Small businesses faced mounting cost pressures, compressing margins and prompting operational adjustments. Energy activity declined as oil prices remained below profitable levels, constraining drilling, profits, and capital investments. Agriculture remains mixed, with weak crop profitability while cattle prices remained strong.
Labor Markets
Labor market conditions improved slightly since the last report, continuing to reflect a relatively stable and balanced market. Measures of labor utilization remain steady, with hours worked holding flat. Demand for temporary workers showed little movement, suggesting firms are neither meaningfully expanding nor contracting short-term staffing. Labor turnover has continued to ease, pointing to improved retention and fewer voluntary separations. One professional services firm noted that when workers in high-skilled, technical roles do switch employers, their motivation is increasingly driven by the desire for new challenges rather than higher wages, with management indicating that boredom and limited growth opportunities have become more prominent factors. Labor absorption remains elevated, highlighting the market's ability to reallocate workers efficiently. One contact reported that recent layoffs at a manufacturing plant in a rural market were largely reabsorbed within a month. Looking ahead, firms expect increased hiring in the first half of the year, particularly in manufacturing.
Prices
Prices have gone up modestly over the month. Firms report that cost pressures remain uneven but persistent, with material inputs and labor-related expenses still moving higher. One firm noted it was now dealing with some working-capital pressure from pulling forward input purchases to mitigate future expected inflation. Separately, a manufacturing firm noted it switched to self-insurance for the first time to manage rising health-care costs. Manufacturing and service firms within the District both reported they will absorb most of the recent input and health-care costs.
Consumer Spending
Consumer spending increased slightly over the last month. Conditions in leisure and hospitality, however, continued to soften, as sales, employment, and hours worked declined moderately. Firms noted more cautious consumer behavior, with one business reporting that customers remain reluctant to commit to long-term memberships. This hesitation suggests sensitivity to price and uncertainty around discretionary budgets. Despite recent weakness, contacts across leisure and hospitality expressed optimism about the next six months, expecting improving demand and a gradual sales pickup as confidence stabilizes.
Community Conditions
Small businesses in the Tenth District reported increasing cost pressures, and contacts expected holiday sales to be down. In addition to higher input costs from tariffs, owners reported increasing insurance, rent, and labor costs. Most contacts indicated that businesses were largely absorbing these costs, leading to tighter profit margins. To manage labor costs, many owners reported taking on more work themselves and spreading hours across fewer employees to keep labor costs manageable. Several contacts noted that marketing budgets were a common cost-cutting target, with AI often replacing the use of consultants. Contacts also reported more owners exploring retirement or the sale of their businesses, particularly in retail and food services, though these pressures were evident across industries.
Manufacturing and Other Business Activity
Service sector business activity increased slightly during the period, with contacts reporting modest gains across a range of subsectors. Capital investment activity also improved somewhat, though overall spending remained cautious. Several contacts indicated plans to increase capital expenditures in the first half of the year, particularly among firms tied to consumer discretionary services such as leisure. One firm shared that it intentionally held elevated cash balances last year amid heightened uncertainty, preserving financial flexibility and optionality. While uncertainty remains, the firm plans to reduce excess liquidity and shift toward more targeted, strategic investments aligned with longer-term growth priorities. More broadly, firms emphasized prioritizing investments that enhance efficiency and capacity rather than expansion. Service firms are expecting sales to improve slightly over the next six months.
Real Estate and Construction
Commercial real estate activity was mostly unchanged. Vacancy rates fell slightly, driven by the quick absorption of new properties available on the market. Contacts highlighted stronger-than-expected leasing activity of industrial spaces, but they emphasized that the terms of these new leases were significantly shorter than usual, with subdued rent growth. The shorter lease terms were reportedly a hedge for renters against uncertainty about the outlook for their businesses over the medium-term. Borrowers reported their access to credit improved modestly in recent weeks, however demand for credit for commercial properties weakened slightly compared to earlier in the year.
Community and Regional Banking
Overall loan quality remains stable, with some deterioration in credit quality expected over the next six months, driven by concerns with agricultural, consumer, and commercial real estate (CRE) loan portfolios. Although total loan demand has been stable over the last two months, the sentiment is mixed, with increased demand for CRE loans and weaker demand for commercial and industrial, residential mortgage, and consumer installment loans. Underwriting standards remain largely unchanged. Deposit levels were relatively stable, though several bankers indicated that seasonal patterns have led to higher public deposit volumes and lower consumer deposit volumes. In addition, respondents continue to note that customers are locking in interest rates on certificate of deposit accounts before market rates decrease.
Energy
Tenth District oil and gas activity declined moderately in recent weeks, with a slight majority of contacts reporting unchanged drilling activity while over a third noting decreases. Firms reported declines in profits and capital expenditures, as oil prices continued to fall below profitable levels while natural gas prices remained slightly above breakeven. Looking ahead, firms expect lower oil prices in the near term and do not anticipate oil or gas prices will support a substantial increase in drilling activity over the next few years. However, contacts have hedged about a quarter of their oil production and nearly a third of gas production for the coming year on average, providing some buffer against further price declines. Additionally, most contacts anticipate that rising data center power demand will boost natural gas demand and support increased drilling activity in the long term.
Agriculture
Weakness in the crop sector continued to weigh on the Tenth District farm economy while strength in the cattle sector provided support in some areas. Crop profits remained limited as soybean prices declined in December, while corn and wheat prices remained stable. While persistently low cattle inventories continued to support strong profit opportunities for cow/calf operations, margins for beef processors remained compressed from underutilized capacity, and a large meatpacking plant in Nebraska announced plans to close in January 2026. The plant accounts for about a quarter of its county's employment and could have a considerable impact on the local economy. Agricultural lenders continued to report that strength in cattle prices was supporting farm finances, and the recently announced ad hoc government assistance was expected to help ease some stress for crop producers.
For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.