Summary of Economic Activity

The Tenth District economy expanded at a moderate pace as 2021 came to a close. Food manufacturing and other non-durable goods production grew solidly, and manufacturing businesses generally sustained elevated levels of activity. Although business confidence about the outlook remained high, planned capital expenditures over the next six months declined slightly outside of the energy sector. Drilling activity in the oil and gas sector remained subdued, but activity among support service businesses rose at a moderate rate. Investments in renewable energy capacity are expected to rise at a robust rate this year. Consumer spending expanded at a moderate pace, particularly in leisure activities and travel, even as Omicron cases began to rise. Businesses continued to recruit workers utilizing both wage increases and enhanced non-wage benefits to overcome labor shortages, actions that contacts expect to continue into the coming year. Looking ahead, businesses cited supply chain disruptions and labor shortages as top risks. COVID was cited as material but less significant risk. Prices increased broadly as businesses incurred additional costs to overcome myriad supply challenges.

Employment and Wages

Employment levels grew at a modest rate in the Tenth District during November and December. Hiring in the services sector slowed compared to previous months but employment at manufacturing firms continued to rise at a strong pace. Contacts reported that labor demand remains high, and that worker shortages held down hiring activity. In particular, demand for childcare, healthcare and hospitality workers remained elevated, but businesses noted the number of applicants was subdued.

Wage growth continued to be robust and broad-based in recent weeks. Looking ahead, contacts reported further expectations of robust wage growth. Planned wage increases for workers in service and transportation sec- tors were particularly elevated, though generally above historical averages across industries. In addition, contacts reported other non-wage costs are expected to rise at a solid rate in 2022. For example, businesses are making larger contributions to health savings accounts, insurance premiums, retirement plans, and adding vacation time. Multiple contacts reported novel ancillary bene- fits, such as "no-meeting Wednesdays" and subsidized pet care services, to attract workers.

Prices

Most businesses reported raising prices to customers at a solid pace. However, input price growth generally outpaced price increases to customers, with manufacturers reporting greater ability to pass through costs than services companies. Some contacts reported resorting to creative, but costly, sourcing strategies, such as buying operationally critical parts via on-line auction platforms. Business contacts remain concerned about continued price pressures in coming months, citing ongoing supply chain challenges, rising wages, and healthcare costs.

Consumer Spending

Spending in the Tenth District grew at a moderate pace. Leisure travel continued to grow robustly, supporting restaurants and hotels outside of city centers. Spending at auto dealerships and entertainment venues remained stable at subdued levels. Resort areas reported record bookings for the months ahead, and contacts generally expect consumer spending to grow over the next six months. Some contacts noted a risk that advances in child tax credit payments may result in unexpectedly small tax refunds, causing a minor headwind to spending this spring, particularly among lower income households.

Manufacturing and Other Business Activity

Manufacturing activity expanded at a moderate pace, driven by ongoing growth in durable goods manufacturing and a pick up in the pace of growth among non- durable goods producers. Notably, food and beverage manufacturing contacts expressed strong growth in order volumes and shipments in recent weeks. However, expectations for growth in the coming months wavered somewhat. While most contacts expect activity will expand over the next six months, they expected slower growth than noted previously. Cooling expectations were reported broadly across businesses, with many noting a slower pace of new orders, while others expressed concerns about capacity constraints as a contributing to slower growth prospects.

Commenting on top risks to the outlook in 2022, business contacts highlighted ongoing supply chain disruptions, higher labor and materials costs, and labor availability. These concerns were expressed broadly across contacts and segments of the manufacturing sector.

Although COVID remains a persistent risk, it was not a top concern for most businesses as of mid-December. Still, most contacts said they would see some disruption in their business operations from a resurgence in the virus.

Capital expenditures continued to rise at a robust rate across businesses. Recent growth in capital expenditure was driven primarily by investment from non-durable manufacturers. Business contacts report continued investments in labor saving technology in order to temper the effects of labor shortages. However, expectations for capital expenditures in the coming months are for a slower pace of growth than expressed in previous months. Planned capital investments slowed primarily among durables manufacturers, which continue to struggle with supply chain issues and labor shortages.

Real Estate and Construction

Residential construction activity remained steady throughout the District, with western states experiencing elevated levels of new construction on single family housing. Demand for new construction of multifamily housing remained high. Several contacts noted that labor constraints are likely to moderate the pace of growth in residential construction over the medium term. Access to financing for new construction did not materially change in recent weeks. However, banking contacts were attentive to valuations of homes and projected values for new projects amid elevated materials costs and the potential that financial conditions may be less accommodative over the medium term.

Banking

Loan demand from commercial real estate borrowers showed robust growth in recent weeks. The primary driver was a pickup in residential real estate construction and lending for other land development projects. However, loan demand in all other categories was stable at relatively low levels. Some contacts noted that, amid subdued loan demand, lenders are adjusting terms on borrowing, in particular extending the duration on new lines of credit. Overall credit quality remained strong.

Energy

Tenth District energy activity grew modestly in December. The number of active rigs remained steady across most District states with a small uptick in oil rigs in Oklahoma. While drilling activity remained mostly subdued, activity among support service businesses rose at a moderate rate. Compared to the previous survey period, oil and gas revenues and profit levels continued to in- crease. Firms also reported higher wages and benefits. Capital spending has increased, and most contacts expected higher capital spending this year compared to 2021. Moving forward, regional firms expected prices to remain profitable on average for oil and natural gas.

However, the average price firms reported needing to substantially increase natural gas drilling remains above price expectations for the near-term, constraining expectations for production growth. Renewable energy production continued to increase at a robust pace across sever- al District states. Looking forward, planned additions to wind electricity production capacity in Oklahoma and Wyoming remain elevated, supporting the outlook for renewable energy investment throughout 2022.

Agriculture

Conditions in the Tenth District agricultural economy remained stable with ongoing strength in the sector. Farm revenues at year end were expected to reach multi-year highs due to elevated commodity prices, but contacts in the region reported further concerns about profit opportunities moving forward. Substantially higher input costs remained a primary concern. In addition, while demand for most major commodities in the region remained strong and continued to support prices, export activity was lower than a year ago for some products as challenges associated with supply chains and port operations persisted. Contacts in the meat packing industry reported that tight labor markets continued to limit pro- duction capacity, particularly for beef and hog processing facilities that are located in less populated areas where labor challenges have been more acute.