Summary of Economic Activity

Growth in the Tenth District slowed to a modest pace, with mixed performance across segments of the regional economy. Consumer spending declined slightly, with the most significant reduction reported for larger ticket items. After several months of historically high growth in the manufacturing sector, overall growth slowed to a modest pace. Contacts pointed to shipping delays, and difficulties procuring or storing materials, as barriers to growth. New demand for residential construction declined amid rising interest rates, though contacts reported that backlogs in orders will support construction employment over the medium term. Energy activity expanded at a solid pace with drilling activity and production rising in several District states. Job growth picked up recently as several contacts pointed to improvement in the number of applicants for open positions. Several businesses across sectors indicated they began to offer pre-paid gas cards or direct payments to offset rising gas prices for workers. Prices continued to rise broadly. Community and regional banks indicated that they continued to hold ample deposits, but started to experience some initial pressures on liquidity as interest rates rose.

Job growth expanded at a robust pace, with broad-based hiring across sectors. Several contacts noted that both the number and quality of applicants for open positions picked up in recent weeks. Those that reported an increase in the number of applicants highlighted improvements for jobs spanning entry-level to management positions. Some contacts suggested the pickup in applications may be tied, in part, to financial strains arising from price pressures. Organizations that primarily serve low- and moderate-income households indicated that conditions for finding work, quality of available jobs and workers’ access to technology improved. Overall, labor demand remains high and the number of job openings across the Tenth District grew modestly. Contacts across sectors reported expectations for modest job growth over the next six months.

Wages continued to rise at a robust pace, but some contacts indicated expectations that wage growth may stabilize somewhat in coming months. Several contacts reported that they began to offer temporary compensation to workers to offset rising gas prices. Some offered pre-paid gas cards as performance or retention incentives, while others made direct payments to workers tied to driving expenses.

Prices grew at a robust pace. Most contacts reported that input price growth continues to outpace selling prices. Compared to the previous six months, manufacturing contacts indicated a greater ability to pass through costs to customers. On the contrary, businesses in the services sector mostly reported no change in their ability to pass along costs over the same time period. Contacts pointed to shifts in customer spending patterns amid higher prices as a factor limiting pass-through of costs in service sectors.

Overall consumer spending declined slightly in recent weeks, with ongoing strength in seasonal leisure and travel spending being offset by moderate declines in spending on larger ticket items. Car sales were down and contacts also pointed to declines in household purchases of furniture. Spending on certain home improvement goods was reportedly below contacts’ expectations for this time of year. Restaurant owners continued to point to shifts in patronage across establishments with different price points. If dining out, consumers were less likely to choose more expensive locations in favor of lower cost options.

Contacts at manufacturing businesses across the District continued to report slowing growth from recent historic highs, with total production expanding at a slight pace. Service business contacts also reported softening growth. Across all sectors, most contacts reported lower expectations for growth over the next six months as compared to previous months. In line with softening expectations, new orders for manufactured goods declined slightly.

The overwhelming majority of District contacts indicated that supply chain disruptions remain a barrier to growth. The lack of available materials and delays in shipping are having the largest effects on businesses. Difficulties in warehousing or storing inventory were also noted as a significant concern. Generally, businesses did not cite rising shipping costs among the most significant logistical challenges. Still, some importers noted that recent declines in freight rates do not fully reflect their shipping expenses over the summer because the higher freight rates set into contracts earlier this year are the most relevant for businesses over the medium term.

Growth in residential construction activity was mixed across segments, with more forward-looking indicators of activity declining moderately. Demand for multifamily housing construction remained elevated. However, financing conditions for new projects tightened recently, leading to fewer projects being initiated in recent weeks. Still, backlogs for multifamily housing development projects remain large by historical standards.

Single family construction declined slightly. The large number of housing projects previously under construction kept the level of activity high. However, the number of buyers for newly built homes fell rapidly across the Tenth District. Contacts noted that the slowing demand for new home construction will likely have lagging effects on employment and materials prices in the sector. For example, demand for crews doing framing for homes, which occurs early in construction, softened a bit while demand for skilled trades associated with the finishing of homes remains healthy. Other contacts noted that materials costs have not softened yet, but expectations are that prices of building materials are likely to come down in coming months.

Loan demand weakened modestly in the past month, particularly in the commercial real estate and residential mortgage segments, due to rising interest rates. While credit quality was unchanged, contacts expected credit deterioration over the next six months, as inflation and rising rates adversely impact borrower cash flow. Banks maintained excess liquidity, but deposit growth moderated in June, in part due to customers seeking higher yields. Contacts sought to defend their deposit shares and temper potential run-off. Increases in unrealized losses within securities portfolios following recent rate increases also placed pressure on liquidity for banks with material holdings of securities designated as Available For Sale.

Tenth District energy activity increased at a solid pace in June. The number of active natural gas and oil rigs rose across Colorado, Oklahoma, and Wyoming, as revenues grew at a solid rate. Difficulties sourcing key inputs, equipment and workers inhibited further production growth. Supply-chain disruptions for bespoke components were also a significant challenge for bringing new renewable energy generation and distribution online. Most firms across traditional and renewable energy segments expected resolution of supply-chain issues to take more than six months. Reported expectations for drilling and business activity over the next six months increased. Contacts in the renewable energy sector indicated that higher interest rates posed some challenges for future additions to generation capacity, given the long-term nature of generation and transmission infrastructure.

Agricultural economic conditions in the Tenth District remained strong through June. Although the price of some key commodities declined slightly from the previous month, both crop and livestock prices remained at multi-year highs. Agricultural prices continued to support revenue prospects, but District contacts continued to voice a heightened concern about significant increases in production costs for both crop and livestock producers. Drought also remained a primary concern. The condition of corn and soybeans was only slightly weaker than a year ago in most states. The condition of wheat in nearly all District states was exceptionally poor and could hinder revenues for many producers.