Federal Reserve Bank of Kansas City
Summary of Economic Activity
Business activity had little change within the Tenth District over the previous month, though underlying conditions showed signs of softening. Retailers and manufacturers drew down inventories and limited new purchases to preserve cash and working capital amid elevated input prices and uncertain demand. Labor was cited as the top limiting factor to growth, as hiring difficulties broadened across occupations and industries and left some firms below optimal staffing levels. Cost pressures also broadened, prompting more frequent adjustments to finished-goods and retail prices. Consumer spending declined slightly due to weak households real income growth, which increasingly weighed on discretionary and nondiscretionary purchases. Expectations for the next six months became more mixed with service firms becoming less optimistic while manufacturers remained optimistic for slight-to-moderate growth.
Labor Markets
Employment growth remained roughly flat across the Tenth District, even as underlying demand for labor strengthened. Firms report that labor availability is the top limiting factor for growth, preventing stronger labor demand from translating into additional job creation. While shortages of skilled workers remain particularly acute, reports of hiring difficulties broadened across occupations and industries, with several firms operating below their optimal staffing levels. Labor market tightness is also contributing to stronger wage growth across multiple sectors. Several contacts that raised wages earlier this spring reported considering additional increases to remain competitive and help employees manage rising living costs. Despite persistent labor supply constraints and limited employment growth, contacts remain optimistic about hiring, generally expecting employment levels to increase slightly over the next six months.
Prices
Prices increased moderately from the previous period, as firms reported a wider breadth of cost pressures. Manufacturers reported moderate increases in raw material costs, led by a sharp rise in steel prices that contacts partly attributed to data-center demand. Equipment prices also increased as firms pursued capital investments to manage persistent labor constraints. Service firms noted rising costs across more input categories, including higher transportation and delivery costs associated with fuel, as well as rising labor costs. Firms reported more frequent and shorter-lag adjustments to finished-goods and retail prices. Service firms expect selling-price growth to remain elevated, while manufacturers expect prices to soften to a modest pace over the next six months.
Consumer Spending
Consumer spending declined slightly within the Tenth District. Contacts reported that World Cup-related activity provided a temporary boost early in the period, but sales subsequently slowed across restaurants, hotels, and discretionary retail stores. Revenues weakened as income and balance-sheet pressures weighed more broadly on households, with consumers increasingly relying on credit cards to manage nondiscretionary spending between paychecks. Amid these household financial pressures, consumption is expected to decline slightly over the next six months.
Community Conditions
Rising gasoline prices have intensified financial strain on low- and moderate-income households already facing higher costs for used vehicles, financing, insurance, and repairs. Rural households have been particularly affected; one contact described a client who has a 100-mile commute, now spends $100 per week on gas, and must work overtime to cover it. Households have redirected funds from rent, utilities, and food while taking on additional debt. Multiple contacts noted people are increasingly using alternative transportation and reducing trips, including to medical appointments. While demand for gas and repair assistance has grown, assistance programs remain severely limited in availability.
Manufacturing and Other Business Activity
Business activity had little change over the previous month. Inventory levels declined across both retail and manufacturing sectors, reflecting efforts to maintain greater financial flexibility amid uncertainty. Contacts reported limiting new purchases to preserve liquidity and working capital as current input prices remained elevated and concerns about future demand grew. These adjustments were particularly evident among service firms as demand softened. Expectations for the next six months have become more mixed, with service firms notably more pessimistic than previously reported, while manufacturers remain optimistic and expect business activity and demand to increase slightly to moderately.
Real Estate and Construction
Demand for residential mortgages declined moderately, both for new single family home purchases and for refinancing activity. Contacts indicated the majority of those refinancings that did take place involved some kind of cash out, as households sought to tap equity in their homes. Although residential mortgage originations declined recently, the volume of home sales was supported somewhat by all-cash purchases for single family homes at price points well above local market medians. Contacts indicated that middle-market price points had very low sales volumes recently. Builders of new homes reported that the traffic of potential buyers was lower than at the same time last year, with no expectations that conditions would change over the next three months. As a result, some builders reported that they reduced head count among construction crews.
Community and Regional Banking
Loan demand and credit standards were largely unchanged across lending categories. However, several respondents indicated moderately stronger demand for consumer installment loans, while demand for residential mortgage loans declined from the prior period. Although overall loan quality remains stable to slightly improving with little change expected over the next six months, some bankers anticipate continued stress in their agricultural and consumer installment loan portfolios. Deposit levels were relatively stable, though several bankers reported modest increases across multiple deposit categories due to higher rates, new customers migrating from local banks that had been acquired, and regular customer seasonality. Respondents expect the steady uptick of M&A activity seen over the last year to continue over the next twelve months. This trend is driven by competition from non-banks and private equity, margin pressures, and leadership succession challenges.
Energy
Tenth District power generation capacity grew at a robust pace in recent months, driven primarily by a large wind project in New Mexico and steady growth in solar across the District. However, electricity generation grew at a moderate pace overall, supported by strong wind generation growth. Contacts in the power and renewables sector reported historically strong electricity demand, driven by growing data center development. They further noted that price-insensitive technology companies are more concerned about the "speed to power" than the price of power. Many new data center projects include co-located generation, resulting in higher power costs and longer project timelines, as manufacturers reach production capacity limits. Contacts are adapting to labor, supply chain, and permitting constraints by vertically integrating operations and reducing the size of power developments to shorten project timelines. While many contacts anticipate higher power costs in the coming years, some noted that increases in consumer electricity prices remain uncertain, as the cost of new generation and power infrastructure is spread across rate payers. In some locations, adding new generation can lower average costs for retail customers due to improved economies of scale.
Agriculture
Economic conditions in the Tenth District crop sector were subdued while conditions in the livestock sector were strong. Profit opportunities for crop producers remained limited and crop conditions weakened alongside intensifying drought, which could further reduce revenues. The share of corn and soybean acres in good or excellent condition was below average, and crop quality was particularly weak in Nebraska and Kansas. Cattle prices declined in early August but remained strong and continued to support profit opportunities for cow/calf producers. According to contacts in the region, robust consumer demand for protein has provided broad support for the livestock sector and has contributed to large investments in dairy manufacturing facilities located in Kansas and smaller investments in facilities in New Mexico and Nebraska.
For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.