Summary of Economic Activity

Total economic activity across the Tenth District fell slightly in February. Consumer spending continued to decline, primarily due to reduced discretionary spending on leisure and retail, while non-discretionary spending on food, energy, and healthcare continued to rise. Several contacts noted declines in workers’ overtime hours, less hiring of temp workers, and fewer new job openings. However, employment levels remained high and labor market conditions continued to be tight. Contacts reported labor costs were elevated and indicated more difficulty in passing these costs to customers in recent weeks. In the housing sector, contacts highlighted the elevated levels of mobility of residents as an opportunity for rental property managers to raise rents more frequently, leading to faster rent growth on an annual basis. The recent surge in rent prices was reportedly a headwind to financing for new multifamily housing development, as the uncertainty about how to estimate future revenue growth from housing properties squelched new projects. Community bankers reported low past due and problem loan levels. Although some bankers highlighted concerns regarding future consumer credit performance, most respondents expected credit quality to remain largely unchanged over the next six months.

Tenth District contacts reported that employment increased moderately over the past few weeks, though the pace of hiring has significantly slowed from its recent elevated level. Businesses continue to report difficulty finding qualified workers to fill open positions, reflecting ongoing tightness in the labor market. Labor force participation declined in most District states over the last few months, further constraining labor supply for businesses seeking to fill open positions. Business contacts continued to report difficulty hiring for entry-level positions, but in recent weeks indicated they are focused on hiring for both entry-level and mid-level positions over the next six months.

While most contacts reported that they currently do not have plans to lay off workers, a greater number of businesses reported they are reducing employee hours, use of overtime, and their hiring of temporary employees. Wages continued to grow moderately for manufacturing and services businesses with expectations for robust growth over the next six months.

Prices rose at a moderate pace across most sectors of the District economy. Contacts in the service sector noted that labor cost pressures continue to rise at a robust pace, but indicated these pressures were increasingly difficult to pass on. In the housing sector, several contacts suggested that elevated levels of residents’ mobility are allowing rental property managers to adjust rents more frequently, leading to faster rent growth on an annual basis. Expected price growth over the next several months remained elevated across most sectors.

Consumer spending fell slightly over the past month, held down primarily by softer leisure and hospitality spending. Contacts reported the return of international travelers this year partially offset recent declines in spending by domestic travelers. Though overall consumer spending declined, businesses noted a bifurcation in spending patterns. Discretionary and more interest rate sensitive consumption categories – such as travel and car purchases – declined at a rapid pace, while spending on non-discretionary consumption categories – such as food, energy, and healthcare – increased modestly.

Low to moderate income (LMI) households in the Tenth District reported greater difficulty securing adequate childcare over the past few months. Contacts cited both a lack of availability and rising costs at childcare facilities as the major barriers faced by households seeking care. Insufficient childcare availability and unaffordability continued to hinder workforce participation among LMI households. Recent policy efforts to improve childcare availability – for example, a recent zoning reform in Wichita, Kansas increased maximum home daycare capacity from 10 to 12 children – have reportedly been more than offset by an acceleration of closures of childcare facilities.

Manufacturing businesses reported that overall activity remained mostly unchanged over the past few weeks. Higher prices supported revenues, but measures of real activity, including production, backlogs, and new orders, declined moderately. Durable goods manufacturers reported more severe declines in production and expectations. Growth among services businesses was mixed across sectors. While retail and tourism businesses reported moderate declines in activity, professional businesses services, transportation, and healthcare businesses reported greater levels of activity.

Across manufacturing and service sectors, businesses indicated tighter financial conditions reduced demand for their products significantly. However, most businesses revised their plans for capital expenditures downward only slightly, which they attributed more to softening demand than to the higher interest expenses from tighter financial conditions.

Developers of multifamily housing indicated further deterioration of conditions from already depressed levels. Rising interest rates continue to be a challenge to financing multifamily housing projects, but contacts also highlighted recent volatility in rental rates as an additional headwind. Uncertainty about projected rent growth is reportedly very high, further hindering financing activities for new projects. Builders of single-family homes reported costs associated with higher interest rates are exacerbated by ongoing delays related to delivery of materials, inspections, and worker shortages. Such delays raise the effective cost of higher rates for builders because that interest expense must be carried over a longer period.

Loan demand weakened modestly in the past month as rising interest rates and continued economic uncertainty weighed on borrower sentiment. Contacts reported weaker demand across all key portfolios but highlighted stable credit quality last month amid low past due and problem loan levels. Although some contacts highlighted concerns regarding future retail credit performance, respondents expected credit quality to remain largely unchanged over the next six months. Deposit levels declined moderately again this month as banks experienced strong rate pressure from other bank and non-bank competitors amidst increases in short-term interest rates. Further, deposits rotated from checking and noninterest-bearing accounts into time deposits and high-yield savings products as customers demanded additional yield on cash.

Tenth District energy activity fell slightly over the last month. The number of newly drilled and completed wells declined, as profitability for drillers began to fall for the first time in two years. Oil prices were roughly flat over the last month and crude oil stocks increased due to unscheduled refinery maintenance, contributing to the recent declines in District rig counts. On average, natural gas rig counts across District states are expected to decline over coming months, driven by generally lower domestic natural gas prices. However, there were some differences among District states. The number of gas rigs ticked up in Wyoming, as regional (western) natural gas prices were elevated. Additionally, Wyoming coal miners saw strong production growth related to higher coal prices in recent months.

The farm economy in the Tenth District remained strong, but risks to the outlook lingered. In the livestock sector, cattle prices increased slightly in February and reached multi-year highs alongside lower inventories. In the crop sector, prices of corn, soybeans and wheat remained high and continued to support profitability. Despite strong market conditions, District contacts reported that elevated production costs, higher interest rates, and ongoing drought in some areas have put downward pressures on profit margins for many producers. Cost pressures have been particularly challenging for livestock operations, with several reports of early calf sales and herd liquidation as a result of intense drought and high feed costs, which could reduce revenues going forward.