Federal Reserve Bank of Kansas City · Beige Book

Federal Reserve Bank of Kansas City

Summary of Economic Activity

Economic activity in the Tenth District grew slightly over the reporting period. Employment levels remained flat, with T1firms prioritizing workflow optimization and productivity, particularly with back-office staff. Several manufacturing firms in the District reported T2suppliers adding automatic surcharges tied to rising energy costs and supply chain disruptions. Although consumer spending increased slightly, T3discretionary categories like retail and auto continue to see softening demand. District oil and gas activity remains steady, as contacts reported increases in revenue and profits. T4Firms have not yet increased drilling or capital expenditure in response to higher gas prices due to uncertainty over the persistence of the increases.

Labor Markets

Labor market conditions have shown little to no change in the District over the past month, with employment remaining relatively unchanged. Firms continue to prioritize workflow optimization, focusing on productivity, particularly with back-office staff. District contacts shared that wage competition remained limited, and only slight increases are warranted to keep in line with inflation. Two manufacturers noted increased reliance on overtime to meet higher demand. Among firms that are hiring, applicant quality has improved. One employer shared that when there is a quit, they tend to backfill with higher-skilled talent at no additional cost. Some firms, particularly in rural areas, have recruited low-skilled production workers from outside the state to address local labor shortages. Looking ahead, firms expect employment to increase slightly over the next six months.

Prices

Prices increased modestly for both services and manufacturers within the District. The pace of growth has accelerated in service sectors, where a consumer retail food firm noted that the conflict in the Middle East has already raised costs, prompting a planned 3 percent increase in prices within three months. Several manufacturers reported automatic surcharges tied to logistics and energy inputs, reflecting concerns about broader supply chain disruptions and higher fuel costs. Firms expect continued modest to moderate input cost pressures if the conflict persists, though final price increases are expected to be more limited amid price-sensitive consumers.

Consumer Spending

Consumer spending increased slightly over the past month. Trends within consumption were uneven, as consumer discretionary sales softened, especially in auto, retail, and hotel segments, amid heightened consumer caution. Meanwhile, nondiscretionary spending picked up, with building materials and food and beverage firms indicating resilience from higher-end consumers and the ability to pass through rising input costs. A firm operating in retail manufacturing shared that "uncertainty drives impulse buying," pointing to a sustained short-term demand for a unique segment of the market. On aggregate, firms expect consumer spending to grow slightly, though it will be mixed across segments.

Community Conditions

T5Financial conditions for low- and moderate-income (LMI) populations have worsened due to persistently high inflation. Contacts noted that prices have increased on auto, health, and home insurance, utilities, and gasoline in recent months. They also saw an increase in credit card utilization, home equity loans, and debt consolidation loans in trying to cope with costs, as the prolonged price pressures have already led to significant cuts in their spending. One contact succinctly stated that LMI households "can't out-budget low wages, tariffs, and inflation." Relatedly, delinquencies and defaults on credit cards and mortgages had also notably increased.

Manufacturing and Other Business Activity

Business activity increased slightly in the District. Manufacturing conditions improved further since the previous report, supported by incremental gains in production and demand. Among service firms, 40 percent reported that increased regulatory costs were affecting their business. One contact noted it had recently added a full-time role dedicated to managing compliance with regulations, underscoring heightened complexity. At the same time, T651 percent of service firms indicated profit margins are expected to decline over the next twelve months. Looking ahead, both manufacturing and service firms expect sales to increase slightly over the next six months, pointing to continued growth.

Real Estate and Construction

The level of commercial real estate (CRE) activity was mostly unchanged. Moreover, financial conditions in the sector remained stable, as developers' access to credit, loan demand, and lending standards remained steady. The overwhelming majority of contacts indicated current financial conditions were only slightly constraining their activity, with the next most common response being that current conditions were not a constraint on financial plans. Refinancing needs were generally low in the near term, and most respondents indicated they have sufficient working capital to avoid liquidity issues. Vacancy rates declined modestly and absorption picked up slightly. All other fundamentals for the sector were stable across the Tenth District.

Community and Regional Banking

Loan demand and credit standards were largely unchanged across lending categories, though several respondents indicated moderately weaker demand for residential mortgage loans. Overall loan quality remained stable, with most bankers stating that recent energy price volatility has had minimal impact to date, and that future credit demand and performance will depend on the persistence of higher energy prices and other economic uncertainties. Multiple respondents cited potential credit risk concerns resulting from the impact of higher energy prices and fertilizer costs, particularly related to agricultural loans. Deposit levels were relatively stable, although several bankers noted moderately stronger growth across all deposit account types since the prior survey period.

Energy

Tenth District oil and gas activity was steady in recent weeks. Contacts reported growth in revenues and profits as oil prices rose due to energy trade disruptions stemming from the Middle Eastern conflict. Despite higher oil prices, most District operators have not yet increased drilling or capital expenditures due to uncertainty over the persistence of higher prices and prevailing industry-wide capital discipline. Looking ahead, most firms anticipate oil prices will support a substantial increase in drilling over the next six months, but only a few expect prices to sustain those levels over the next year amid concerns that higher prices will eventually result in lower demand. Still, about a third of contacts reported increasing hedging activity to lock in current elevated prices.

Additionally, some firms noted that increased oil drilling adds to the associated natural gas supply, which can place downward pressure on natural gas prices, reducing profitability for gas-heavy plays in the District.

Agriculture

Conditions in the Tenth District farm economy remained bifurcated, amidst heightened uncertainty from recent volatility in commodity and fertilizer markets. Crop prices increased in March, but profits remained narrow, and a surge in fertilizer and fuel prices raised concerns about increased costs. Strong cattle prices supported cow/calf profits and boosted incomes in many areas. T7Agricultural lenders reported gradual deterioration in loan repayment rates, and material increases in carryover debt and loan restructuring compared with a year ago. Despite ongoing challenges, farm real estate values remained steady, and many lenders cited better than expected crop yields in 2026 and government assistance as additional sources of support.

For more information about District economic conditions visit: https://www.KansasCityFed.org/research/regional-research.