Summary of Economic Activity

Real economic activity in the Tenth District declined slightly in recent months. The pace of job growth slowed due to the combination of lower demand from employers and ongoing labor supply constraints. Though growth in labor demand reportedly cooled, employers still indicated they are using higher compensation and additional training to build their workforce over the next several months. Consumer demand fell slightly in recent weeks, both for lower-priced goods and for personal services. The volume of consumer purchases fell broadly, but higher prices led to modest increases in total consumer expenditures. Activity among services businesses grew slowly, with the exception of advertising activity, which fell sharply over the past month. Manufacturing production declined modestly. Although selling prices continued to rise at a robust pace, several contacts noted growth in the prices of construction materials and other manufacturing inputs slowed. Also, growth in rent prices moderated from recent highs. Commodity prices declined by a small amount. Despite lower crop prices and worse-than-anticipated consequences of drought in the region, farm incomes and ag credit conditions improved modestly.

Tenth District contacts reported employment growth was mostly unchanged, as many employers slowed their hiring efforts in recent weeks. Contacts reported the reduction in the pace of hiring is partially due to cooling labor demand coinciding with lower expectations for growth in sales. Businesses also pointed to ongoing difficulties finding employees with requisite skills amid still-elevated labor demand. To fill open positions, most contacts noted they continued to raise compensation levels and increased the level of on-the-job training they offered to underqualified hires. A few contacts alternatively noted they accelerated their planned investments in automation to alleviate labor supply constraints. Despite recent slowing in hiring, most contacts reported expectations for modest employment growth over the next 12 months, citing expectations for growth, overworked staff, and demand for more skilled workers.

Wages rose at a moderate pace, with most contacts noting ongoing efforts to raise starting wages across job categories to attract new hires. Firms also reported they have been adjusting wages and salaries more frequently than in previous years to retain existing employees, as the cost of bringing on new hires is becoming burdensome.

Most District contacts reported that selling prices continued to increase at a robust pace. However, input price growth slowed to a moderate pace, primarily due to easing growth in costs of manufacturing inputs. Although expectations that prices will continue to rise over the next six months were prevalent, a larger number of manufacturing businesses expected price pressures to ease somewhat over the medium-term. The cost of housing remained a significant source of inflationary pressure for households in the District. Rent prices continued to increase at a moderate pace, though the pace of rent price growth eased from its historic high over the past few months.

Several contacts indicated that consumer demand declined slightly in recent weeks. For example, hair salons and studios reported giving fewer haircuts, and restaurant owners indicated patronage fell modestly in recent weeks. Demand for consumer goods, particularly lower-to-middle priced items, also fell modestly. Yet, high-end entertainment venues and travel resorts reported ongoing strength. Although the total volume of purchases across goods and services fell, total spending increased slightly due to higher prices.

Small and micro enterprises reported tighter cash flows resulting from increased costs and slowing demand amid rising economic uncertainty. Small business contacts suggested banks demonstrated more risk aversion in their lending, exacerbating funding challenges for small businesses. When possible, business owners have been funding investments with cash as opposed to acquiring new debt. Also, contacts from community development financial institutions reported more business owners are utilizing non-traditional financing methods such as unsecured lines of credit and online finance firms that require higher interest rates, shorter terms, and more onerous repayment terms. Additionally, lender contacts reported that small business owners are exhibiting caution in their investment decisions, holding off on financing projects through the first half of 2023.

Overall activity among service providers rose modestly in recent months. Yet, several District contacts noted that demand for advertising services declined sharply in recent months. The decline was reported broadly across media types and across the types of goods and services being promoted. Though use of data storage and processing remained elevated, several businesses reported additional investments in software to diminish their use of data server services due to rising costs associated with high electricity prices. Manufacturing activity declined modestly in recent months as both revenues and total volumes of shipments fell. Several contacts noted that the availability of transportation services improved recently. Although growth slowed broadly, contacts across services and manufacturing reported favorable expectations for modest growth over the next 6 months.

Multifamily housing real estate activity declined abruptly in recent weeks. This decline arose despite a backdrop of elevated demand for housing across the District and declining prices for construction materials. The downshift was attributed solely to higher interest rates and the outlook for higher rates over the near term. Debt financing for multifamily projects became less available over the last several months, but brokers and builders indicated that private equity and other sources of capital diminished sharply in recent weeks. Although the number of new multifamily housing deals declined sharply, construction activity was mostly unchanged due to the backlog of projects already underway.

Loan demand weakened modestly in the past month. Bankers noted rising interest rates reduced demand for credit and pressured residential real estate valuations. Contacts expected further weakness in loan demand during the first quarter of 2023 amidst rising borrowing costs and economic uncertainty. Credit quality remained stable, but bankers cited concerns around performance of consumer loan segments in the coming months. Deposit levels were mostly stable, although rate-sensitive customers sought additional yield for their excess funds. Some contacts noted that deposit relationships are now being factored into loan pricing decisions as banks seek to generate and maintain liquidity. Finally, rising interest rates continued to pressure bond portfolio valuations, resulting in reduced tangible book value and impacting potential merger activity.

Tenth District energy activity expanded slightly compared to recent months. Although overall activity increased slightly, significantly lower natural gas prices, driven by higher production and export disruptions, resulted in a meaningful reduction in active natural gas rigs within the District. Higher oil prices over the last month provided a boost to oil drilling activity. The number of newly drilled wells rose faster in Colorado, Wyoming, and Oklahoma compared to growth in drilling activity in New Mexico. Well completion activity was up slightly across all major drilling basins within the District, bringing additional supply online. Business contacts continued to report high costs, with oil field services firms indicating a moderate increase in costs over the last month, albeit at a slower pace than earlier this year.

The Tenth District farm economy generally remained strong despite slightly lower commodity prices and intensifying adverse effects of drought in certain areas of the District. Overall, farm income and credit conditions continued to improve modestly. However, contacts in areas most impacted by drought reported that farm income and liquidity were slightly lower than a year ago. As harvest neared completion, crop yields were generally expected to be less than average across all states and were particularly poor in Kansas and Oklahoma. Dry conditions also reduced hay production throughout the region and is likely to push feed expenses higher for many livestock producers.