Federal Reserve Bank of Kansas City · Beige Book

Federal Reserve Bank of Kansas City

Summary of Economic Activity

The Tenth District economy expanded at a modest pace in the first two months of the year. Although the surge in COVID-19 cases associated with the Omicron variant slowed spending and hours worked in the leisure and hospitality sector, activity rebounded quickly as the surge diminished and grew steadily across other service and manufacturing sectors. Rising commodity prices supported farm incomes and growth in energy activities. Contacts reported that demand for commercial real estate construction grew, bringing project bookings to their highest levels in several years. T1Supply chain disruptions adversely affected most businesses, leading many retailers and manufacturers to adopt more costly sourcing strategies. Wages grew at a robust pace across industries and occupations.

Although wages paid in lower-skill jobs increased, losses in hours worked associated with the pandemic slowed income growth for many low-income households near the start of the year. T2Contacts reported broad-based cost pressures, which they expect will persist through the coming year. Prices grew at a robust rate but most contacts indicated that they did not fully offset rising input costs.

Labor Markets

T3Total hiring grew at a modest pace near the start of the year, constrained by labor shortages. Several businesses reported job openings in excess of twenty percent of their current workforce, with more jobs open than are actually posted. Employment growth at retail businesses offset temporary shortfalls in hiring at hotels and restaurants, resulting in greater services employment overall. Total hours worked in leisure and hospitality declined sharply in early January, but rebounded in recent weeks. Manufacturing employment grew at a moderate pace.

T4Wage growth remained robust and broad-based in recent weeks. Many low-wage workers reported wage gains obtained by job switching or union bargaining outcomes, but also noted inconsistent incomes due to lost working hours associated with school closures or family illness in early January. Contacts noted they continued to increase non-wage benefits offered to workers, but some reported that these benefits did not attract a larger number of applicants. In particular, applicants for entry-level or low-wage jobs favored higher wages over additional benefits. Most businesses expect wages to continue growing over the medium term.

Prices

Prices continued to increase at a robust pace. Input costs also grew robustly and generally outpaced growth in selling prices. T5Most businesses reported being able to pass only a small portion of increased costs to their customers, but some contacts indicated their ability to fully pass-through cost pressures. Nearly all firms reported price pressures were broad-based, citing increases in costs for materials, labor, energy, financing, real estate, and shipping, with expectations for additional increases in costs over the medium term.

Consumer Spending

Overall consumer spending slowed slightly at the beginning of the year amid the latest surge in the number of COVID-19 cases. T6However, expectations for growth in spending on services over the next six months remained elevated and contacts noted a quick rebound in activity at restaurants and hotels in recent weeks. Some contacts at retailers expressed concerns that consumers had already purchased several years' worth of goods, particularly those associated with leisure activities. As a result, many goods retailers reported they are "hedging their bets" with regard to ordering inventory for the coming year, even though consumer demand remained high.

Manufacturing and Other Business Activity

Growth in the manufacturing sector slowed to a modest pace, with total levels of activity near historic highs. The leisure and hospitality sector remained sensitive to developments related to the pandemic, but other business activity expanded throughout recent weeks. Expectations for growth remained elevated broadly. Nearly all contacts reported no expected changes in business plans related to the pandemic over the medium term.

Contacts across many sectors, geographies and sizes reported changes to their procurement plans for the coming year to include a broader network of suppliers, in an attempt to shorten or stabilize delivery times. Yet, most contacts expect that costs of sourcing from new suppliers will remain elevated. Some indicated that the new relationships with suppliers, or lack thereof, would increase procurement costs over the medium term. Others indicated procurement costs would remain elevated because of the need to double-order inventory, choosing to take on risks of having too much inventory to ensure delivery of needed materials.

T7The outlook for capital expenditures from business contacts was mixed across sectors. Planned investments among aerospace and other transportation businesses increased recently, and also at food manufacturing businesses. Many of these capital expenditures are aimed at automation to mitigate the effects of labor shortages. In healthcare, planned capital expenditures were suppressed and aimed at maintaining capacity, rather than expanding it. Contacts in hospitality sectors reported growth in plans to renovate and upgrade spaces to attract customers. In addition to capital expenditures, several contacts noted that spending on marketing and advertising is growing amid healthy consumer demand.

Real Estate and Construction

T8Demand for new construction in commercial real estate grew robustly in January and February. Most contractors reported the level of projects booked currently is at, or above, pre-pandemic levels. However, contacts reported that difficulties in sourcing materials are leading to costly redesigns or delays for their customers. As a result, recent contracts have eschewed commitments on delivery dates and committed only to a price, unable to guarantee both. Moreover, contacts in both the public and private sector reported difficulty in soliciting bids from contractors for projects, eroding their bargaining power that would otherwise mitigate price pressures.

Community and Regional Banking

Loan demand remained stable across a variety of sectors, although some contacts highlighted slight softening in demand for C&I and residential mortgage loans in recent weeks. Credit conditions remained benign with low levels of past due and non-performing loans. Contacts expected credit quality to remain sound over the near term, citing commodity price increases and improvement in pandemic-sensitive sectors as key drivers. Deposit levels also remained stable, with slight growth noted in demand deposit accounts at several institutions as commercial balances were bolstered by strong customer earnings. Contacts were attentive to the outlook for inflation and prevailing difficulties with staffing at their organizations.

Energy

Tenth District energy activity expanded modestly at the start of the year. The number of active rigs continued to increase in Oklahoma and total oil & gas production grew as crude oil prices reached a seven-year high. Natural gas prices also rose; however, future price expectations for natural gas remained more moderate. Higher natural gas prices also led to growth in coal mining activity in Wyoming as electricity utilities substituted toward the less costly fuel. Demand for coal mining equipment and maintenance was expected to remain elevated over the next eighteen months. Energy employment across District states continued to lag pre-pandemic trends but increased slightly from a year ago. Labor costs increased moderately, as many firms continued to report higher wages and benefits for workers.

Agriculture

Prices of most major commodities in the region increased modestly through early February from already high levels, continuing to support farm incomes. The prices of wheat, cotton and hogs increased modestly from the previous month while corn, soybean and cattle prices increased more sharply. Despite growing concerns about supply chain complications limiting shipping activity, U.S. agricultural exports remained strong and supported demand. Rising input costs have put some downward pressure on profitability for producers, but broad strength in the farm economy continued to support agricultural credit conditions, and farm finances were further bolstered by sharp increases in farmland values.

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