Summary of Economic Activity
Economic growth in the Tenth District was modest and balanced across sectors. Yet, contacts reported expectations for strong demand growth in coming months, which supported their plans to increase hiring and capital expenditures over the near term. Consumer spending resumed its healthy pace seen over the past year, but contacts noted consumers recently became more price-sensitive and quality-sensitive. Contacts viewed the cycle of commercial real estate delinquencies as not yet over, but also viewed the associated risks as being well distributed such that further strains would not lead to a significant decrease in the flow of credit to the sector. Still, loan demand was tepid amid volatility in longer-term rates. Renewable industry contacts reported growing commercial electricity demand from large data centers as a key driver for generation capacity additions in coming years. Conditions in the farm economy remained subdued, and many contacts cited declines in farm equipment values as a growing concern.
Employment levels remained steady across the Tenth District. Hiring activity was subdued as few contacts reported adding headcount recently and nearly all businesses reported worker turnover was abnormally low. Contacts expected hiring activity to pick up over the next year due to a positive outlook on demand and, to a lesser extent, an overstretched workforce. The flow of applicants for open positions picked up mildly. Most contacts noted the typical quality of applicants for skilled positions diminished relative to last year, while others indicated they were tightening hiring standards for lower-skilled positions. Wage growth picked up in recent months driven by professional service and technology sectors, industries where compensation growth and hiring had been subdued over the past year. More broadly, most contacts indicated they do not plan to raise wages substantially over the next year.
Prices continued to grow slowly over the last month. Input prices continued to rise moderately for both services and manufacturing firms. However, reports on selling prices were mixed. Service firms noted modest growth in selling prices due to an inability to pass higher costs on to customers, while selling prices grew moderately for manufacturers as they maintained slightly more pricing power. Expectations for finished product and service prices in the coming months were also relatively higher among manufacturing firms.
Consumer spending growth returned to a modest pace, rebounding from a late-summer slump. Expectations for continued growth in consumer demand reportedly prompted firms to increase hiring and planned capital investments over the next six months. However, contacts in the leisure and hospitality sector reported softening activity. Some of the modest declines were attributed to a normalization of spending following a period of robust growth over the last few quarters. Several other contacts noted consumers became both more price- sensitive and quality-sensitive in recent months. Travel spending was more regionally focused, oriented toward bargain options. Contacts also indicated customers were more likely to discard loyalty programs and were less likely to be repeat customers due to low-quality service. Even amid the more competitive environment on price and quality, contacts indicated expectations for growing leisure and hospitality spending through the end of the year.
Contacts reported job openings in low-paying occupations remained plentiful, and workers in those jobs were still finding wage gains from job hopping. However, compared to earlier in the year, contacts also reported more workers faced lost hours and income, had difficulty in finding full-time work, and were increasingly likely to take second jobs to make up the difference. The number of recently laid off workers in low-wage occupations remained very low across the District but was reportedly above the national trend, particularly in Nebraska and Oklahoma where weakness in agricultural conditions posed a headwind to labor demand.
Business activity was roughly unchanged over the last month. While manufacturing contacts reported modest declines, professional and consumer services activity rebounded and grew at a moderate pace. Contacts reported a continued willingness to invest in their businesses, driven primarily by favorable expectations for demand over the next year. Several contacts also noted they had delayed some capital spending amid recent uncertainty or had expectations that prices for capital equipment will soften in coming months, both factors providing tailwinds for an acceleration in business investment in coming months. Planned capital expenditures were broad-based, growing at a modest pace for both manufacturing and services firms. Many contacts reported they are opting to self-fund capital expenditures, making those firms’ investment decisions less sensitive to still-high borrowing costs.
Investor sentiment in commercial real estate (CRE) improved in recent months, driven by shifts in market participants’ perception of the distribution of risks across the financial system. Contacts noted the cycle of rising CRE delinquencies and defaults is not over. However, the risks associated with CRE loans were viewed as being distributed across banks, trusts, private equity, and bond holders such that further delinquencies would not lead to a significant decrease in the flow of credit to the sector. Contacts indicated credit remained available but noted loan demand was relatively low due to higher interest rates on longer-dated tenors and elevated levels of volatility in interest rates that made deals difficult to complete.
Loan demand was unchanged across most categories, though several contacts noted lower demand for residential mortgage loans in a reversal of a pickup in demand observed previously. Overall loan quality largely was steady, with mild deterioration in consumer lending. The outlook for credit performance over the next six months was for ongoing stability, though several respondents expressed concerns about modest deterioration. While credit standards were primarily unchanged across lending categories, some contacts indicated credit standards for commercial and industrial loans tightened somewhat due to a change in expectations for the economic outlook. Deposit levels remained stable, though respondents noted a continued migration into certificate of deposit accounts due to customers anticipating rates to decline.
Renewable energy activity continued to grow at a moderate pace in the Tenth District. Electricity generation via renewables grew at a moderate pace in recent months, led by a robust growth in solar and more modest increases in wind. Generation capacity additions mirrored recent growth in actual generation between solar and wind. Renewable industry contacts reported growing commercial electricity demand from large data centers as a key driver for generation capacity additions in the coming years. However, utilities and developers are facing challenges in rapidly building new generation to meet growing demand. Contacts noted constraints in permitting and building new electricity infrastructure (particularly inter-regional transmission), elevated equipment costs, and persistent skilled labor shortages as key headwinds for new renewable energy projects. Despite these restrictions, expectations were for an increase in the pace of renewable investment next year, primarily driven by a few larger wind generation projects in the District.
Conditions in the Tenth District farm economy remained subdued despite a slight increase in crop prices. Corn and soybean yields were above the five-year average in all states except Oklahoma and could boost revenues, but profit opportunities stayed narrow. Despite strong production overall, pockets of drought also hindered crop production in certain areas of the region. Cattle prices climbed further in early November and kept margins for cow/calf producers strong. Many District contacts cited notable declines in farm equipment values as a growing concern and continued to note lower liquidity for crop producers and high interest rates could weigh further on farm finances in the coming months.