Federal Reserve Bank of Kansas City
Summary of Economic Activity
Business activity in the Tenth District continued to hold steady in a pattern of subdued conditions punctuated by pockets of strong demand. Durables manufacturing and business services were the strongest segments; however, it was noted that the data center buildout has crowded out other production and put pressure on the labor market. Firms have increased average hours, added overtime options, and extended shifts because of limited labor availability. There have been several reports of rising diesel prices and shipping costs, as well as delays in receiving inventory. Most firms reported being able to pass these costs on to consumers. However, services firms reported less ability to increase their selling prices, putting more pressure on profit margins. These costs and pricing pressures have squeezed margins across the value chain, prompting suppliers, distributors, and customers to renegotiate terms in an effort to protect profitability. Business activity is expected to increase slightly over the next six months.
Labor Markets
Labor conditions in the Tenth District have experienced little to no change since the last Beige Book, despite strong demand for labor from manufacturing firms. Manufacturing companies have indicated that they increased average hours, added overtime options, and extended shifts because of the limited labor availability within the market. One manufacturer noted, "It is hard to expand the workforce when they leave faster than you can replace them." Unlike manufacturing firms, services firms, particularly retailers, saw a slight decrease in employment, part-time positions, and hours worked over the last month. Employment is expected to grow slightly within the District over the next six months, and wages and benefits are expected to increase moderately.
Prices
Prices increased moderately across the Tenth District. Manufacturing firms noted that increases in the costs of aluminum, copper, and fuel are driving up their input costs. There have also been several reports about increasing shipping costs and delays in receiving inventory. Most firms reported being able to pass the costs on to consumers. Meanwhile, services firms also reported increasing costs, especially for shipping. However, services firms reported less ability to increase their selling prices, putting more pressure on their own margins. Both services and manufacturing firms expect prices to increase at a modest pace over the next six months.
Consumer Spending
Consumer spending declined modestly across most retail sectors within the Tenth District. Several firms noted that fuel prices have weighed on consumption, both by reducing household purchasing power and dampening consumer sentiment. Furthermore, households were more likely to eat at home, shift down on quality, and forgo planned purchases to help make ends meet. While higher income households supported consumption over the summer, contacts shared that hotel bookings and purchases slowed down over the last two months. Firms expect consumption to remain flat with little change over the next six months as they expect households to remain cautious.
Community Conditions
Organizations serving small businesses reported deteriorating financial conditions for their clients, primarily driven by worsening credit quality and reduced cash flow. They attributed the challenges to higher prices and ongoing policy uncertainty. Additionally, organizations reported that the Small Business Administration had implemented tighter lending standards. According to our contacts, small businesses were increasingly seeking liquidity through merchant cash advances (MCAs), often to cover overhead and payroll expenses. They also noted that the high cost of MCAs and the lack of education about this funding product have exacerbated the difficulties faced by small businesses.
Manufacturing and Other Business Activity
Business activity in the Tenth District continued to hold steady in a pattern of subdued conditions punctuated by pockets of strong demand. Contacts in both durables manufacturing and business services indicated that orders and sales improved moderately over the previous month. Durables manufacturing firms pointed to military contracts and the data center buildout as not only strong, but also as crowding out other production. Business service contacts noted that increased technology and infrastructure spending was spilling over into consulting, IT, engineering, and other services. The majority of firms within the District noted that higher fuel costs weighed on current orders and sales and expected demand to weaken further if fuel prices remained elevated. Additionally, several firms reported that rising diesel prices had intensified margin pressures across the value chain, prompting suppliers, distributors, and customers to renegotiate terms in an effort to protect profitability. Activity is expected to increase slightly over the next six months.
Real Estate and Construction
Commercial real estate (CRE) activity rose moderately across several property types. However, contacts expressed heightened uncertainty or expectations of softening activity going forward due to the recent increase in long-term interest rates. Many contacts indicated more time is needed to assess the effect of higher rates on their pipeline of deal activity. Adding to the uncertainty was the context of prior refinancing activity when owners extended terms, brought additional equity, or adjusted to a floating rate, which reportedly weighed on owners' willingness to take losses on property sales in the current environment. Market participants indicated access to credit diminished recently, while lenders reported that spreads on CRE loans rose substantially, with expectations that spreads will increase further in coming months.
Community and Regional Banking
Loan demand and credit standards were largely unchanged across lending categories, although several respondents noted moderately weaker demand for commercial real estate loans. Overall loan quality remained relatively stable, though multiple bankers noted marginal deterioration across lending categories. Respondents expect stable loan quality over the next six months; however, several respondents anticipate modest deterioration centered in agricultural and consumer loans. Loan pricing spreads remained largely unchanged. Moreover, during the next six months, most bankers anticipate that loan pricing spreads will stay the same or increase moderately, while term deposit rates and non-maturity deposit rates are expected to increase moderately. Deposit balances were stable overall, with some respondents observing an increase in demand deposit balances.
Energy
Tenth District oil and gas activity continued to increase moderately in September, with nearly a quarter of contacts reporting increased drilling. Although oil prices are volatile, they remain well above breakeven levels, boosting growth in profits and capital expenditures. Amid the ongoing Middle Eastern energy supply shock, several regional contacts in rural Colorado reported intermittent diesel shortages at gas stations in recent weeks, causing some buyers to take early delivery of fuel shipments to ensure availability. Looking ahead, oil and gas firms expect activity and investment to increase further in the next six months. Still, a slight majority expects oil prices to fall below levels needed for substantial increases in drilling in the next six months, as some anticipate further reopening of the Strait of Hormuz. However, contacts stressed the significant uncertainty in the outlook for oil prices, as they are currently affected by circumstances outside normal supply and demand dynamics.
Agriculture
Agricultural economic conditions in the Tenth District were subdued alongside volatile commodity prices and increased input costs. Crop prices rose notably in early September and stayed above year-ago levels, but market conditions were volatile, and a surge in diesel prices and severe drought in some areas raised concerns about costs and revenue. A food manufacturer also cited diesel costs as a concern, with higher freight expenses expected to meaningfully affect operations and profitability. Agricultural credit conditions deteriorated gradually. While high cattle prices provided support in some areas, many lenders noted that weakness in the crop sector had a modest negative effect on broader economic conditions.
For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.