Federal Reserve Bank of Kansas City
Summary of Economic Activity
Economic activity expanded slightly within the Tenth District, which was similar to the previous report. Manufacturing activity continued to improve, supported by higher shipments and production, while firms reported ongoing competition for skilled labor, particularly machine operators and welders. Inflationary pressures continued to compress profit margins, prompting firms to rely primarily on selective price increases and investments in cost-saving technologies while closely monitoring consumer responsiveness to pricing decisions. Consumer spending remained flat, as modest declines in auto sales and general retail were offset by continued strength in travel, tourism, restaurants, and drinking establishments, with bankers noting early signs of increasing household financial stress. At the same time, capital spending improved as firms pursued facility expansions and relocations to take advantage of enhanced investment expensing provisions. Firms expect slight growth over the next six months, although uncertainty surrounding costs and consumer demand remains elevated.
Labor Markets
Employment increased slightly, with manufacturing firms leading the job growth while hiring among service providers changed little, aside from increased demand for part-time and temporary workers to support higher travel activity and the World Cup. Manufacturing firms reported continued competition for skilled machine operators and welders, with workers willing to commute for up to 45 minutes for slightly higher wages. One employer noted that employees have become increasingly willing to change jobs for as little as a one-dollar-per-hour, reflecting greater wage sensitivity as household financial conditions tighten. Overall wage growth remained modest, though firms continued to selectively raise pay for difficult-to-fill skilled positions. Despite ongoing hiring challenges, employers generally remained committed to retaining workers. On the whole, firms expect slight employment growth over the next six months.
Prices
Prices increased moderately within the Tenth District. Despite improving activity, firms continued to report pressure on profit margins. While tariffs remained part of the discussion, many contacts attributed recent cost pressure to persistent volatility and uncertainty in energy markets. To preserve margins, firms most frequently reported raising prices and investing in cost-saving technologies. Several firms also described recalibrating pricing strategies based on observed consumer responsiveness to prior increases, reflecting heightened attention to household financial conditions and price sensitivity. Other strategies include reducing planned expenditures, diversifying suppliers, and cutting overtime or working hours. Firms expect raw materials and other input costs to remain high over the next six months.
Consumer Spending
Consumer spending within the Tenth District was flat. Within discretionary spending, however, two segments diverged. Auto sales and general retail firms noticed modest declines, while travel, tourism, restaurants, and drinking establishments continued to report growth. During a banking roundtable, several lenders noted that roughly half of the new auto loans they originate involve borrowers with negative equity from a trade-in, although they cautioned that this reflects a higher-risk borrower pool. One banker noted that while auto loans stress is increasing, conditions have not deteriorated to crisis level, suggesting concerns are manageable at present. Separately, a national home furnishings company expressed concern that persistent inflation is permanently shifting middle-income households toward lower-cost imported goods at the expense of higher-quality domestic products. Firms generally expect sales to rebound to a moderate pace of growth over the next six months.
Community Conditions
Employment services organizations across the Tenth District reported growing challenges for both employers and jobseekers. Employers said they were willing to train candidates with technical skill gaps but struggled more with those lacking soft skills. Small businesses were also cutting jobs as lower- and middle-income consumers cut discretionary spending and as overhead costs increased. Jobseekers reported increased difficulty getting past AI application screeners, even with help from career assistance centers. They also started to favor jobs offering greater stability and advancement opportunities rather than positions based solely on hourly pay, even though fewer of these jobs were available.
Manufacturing and Other Business Activity
Business activity increased slightly, with both manufacturing and services reporting growth, although manufacturing expanded at a faster, albeit moderate pace. Manufacturers cited increased shipments and production compared to the previous reporting period. After several months of relatively subdued investment, firms reported a modest increase in capital spending over the past two months. Several contacts attributed the improvement to planned facility expansions and relocations designed to take advantage of recently enhanced capital investment expensing provisions. While firms remained cautious about the economic outlook, investment activity reflected a greater willingness to pursue strategic projects rather than defer expenditures. Firms expect slight growth over the next six months.
Real Estate and Construction
Contacts in the commercial real estate sector indicated that the capital flow to support property sales and other transaction activity rose moderately. However, developers reported that credit for new property development was modestly harder to access, particularly in the multifamily housing sector. The prices of acquired properties rose moderately compared to earlier this year and were reportedly substantially higher compared to a year ago. While sales, refinancing activity, and prices of commercial properties were all up, contacts noted that most transactions involved owners contributing additional capital or accepting a smaller ownership share. Additionally, contacts indicated that many more transactions used floating rates earlier this year, a trend that has stalled in recent months.
Community and Regional Banking
District banks noted loan demand and credit standards were largely unchanged across lending categories, though several respondents indicated moderately stronger demand for residential mortgage loans. Overall loan quality remained relatively stable; however, some banks experienced modest deterioration, largely concentrated in commercial real estate (CRE) loans. The primary outlook for credit performance over the next six months is for ongoing stability. Respondents noted minimal loan extensions or other modification activity in the past six months and similarly expect minimal activity over the next six months, focused on the CRE and agricultural loan segments. Bankers indicated deposit levels have been comparatively stable.
Energy
Tenth District oil and gas activity increased moderately in June. Nearly a quarter of contacts reported increased drilling while over two-thirds reported unchanged activity, citing uncertainty and price volatility. Although oil prices have come down in recent weeks, they remain above pre-Middle East conflict levels, boosting District firms' profits and capital expenditures. Despite potential supply chain and financing constraints, over a third of contacts increased capital expenditure plans from the beginning of the year, while most firms are sticking to their original investment plans. Looking ahead, District firms expect activity to increase slightly in the coming months, but do not anticipate oil prices will reach levels supporting a substantial increase in drilling.
Agriculture
Strength in the cattle sector continued to support the Tenth District farm economy but ongoing weakness in the crop sector weighed on conditions in many areas. Cattle prices stayed near record highs and contacts in many parts of the region reported that strong calf revenues were supporting farm finances and credit conditions. Profit opportunities for crops remained limited and lenders noted the outlook for the sector was an ongoing concern. Drought also intensified in the southern and western portion of the region and was mentioned as a key risk for crop and livestock producers. Despite ongoing challenges for many operations, deterioration in agricultural credit conditions and loan performance was modest during the most recent survey period and farmland values were stable.
For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.