Summary of Economic Activity
Economic activity was unchanged on balance across the Tenth District. However, consumer spending decreased moderately across several spending categories. Prices rose at a moderate rate. While higher prices deterred spending, business contacts indicated they were more likely to scale back production rather than take a hit on margins by softening pricing. Nearly all business contacts expected recent trade policy shifts will push their costs higher. Contacts in residential real estate construction highlighted discussions of escalation clauses during negotiations in recent weeks, as builders and investors sought protections from anticipated materials cost growth in lumber and metals, which they attributed to changes in trade policy. Employment levels remained steady overall, though contacts noted a rise in labor force churn. Most contacts maintained a favorable outlook for hiring plans and planned capital expenditures but reports of delaying plans or considerations of scaling plans back were common in recent weeks. The outlook among community service organizations was reportedly much less favorable.
Employment levels remained steady in the Tenth District, though contacts noted a rise in the reallocation of workers. Several companies highlighted establishment closures with job losses that were offset by planned hiring at other locations. Other contacts reported they hired recently displaced workers from other businesses or sectors. Smaller firms indicated relatively more difficulty in recruiting or retaining workers as they struggled to compete with larger firms on wages and non-wage benefits such as training programs. Most contacts across a broad set of sectors continued to report positive expectations for employment growth over the next six months. However, many businesses indicated recently they delayed their hiring plans to “wait and see” how things develop going forward, and several reports of “scenario planning” to forgo hiring or reduce headcount arose in recent weeks.
The pace of price growth rose over the last month, with prices rising moderately. Input prices for manufacturing firms exhibited a notable uptick, while service inputs continued growing moderately. Most businesses expressed difficulty in passing higher costs to their customers, indicating potential demand destruction as a primary concern. Yet, business contacts indicated they were much more likely to scale back rather than take a hit on margins by softening pricing. Looking forward, most contacts anticipate higher business costs, with insurance expenses, materials costs, and transportation being the categories expected to rise the most. The majority of contacts also anticipated higher business costs in the coming year due to recent tariff announcements. In particular, contacts in agricultural manufacturing and real estate developers expressed concerns over rising metal and lumber prices.
Consumer spending decreased moderately across most categories. The largest pullback in spending was reported among retail businesses and in the leisure and hospitality sector, but spending on durable goods and at restaurants also softened. Contacts indicated consumers “pushed back against recent price increases,” resulting in lower sales volumes and revenues. Despite recent declines in spending, contacts’ expectations about sales growth for the next six months were generally positive, albeit less strong than reported in recent months.
Service organizations involved in workforce training, small business support, and providing childcare broadly reported substantial amounts of uncertainty about their long-term funding. Most contacts suggested they were able to manage recent liquidity challenges to support their activities for the short-term, ranging from a week to a couple months. However, many organizations reported they are scenario planning in the face of uncertainty about funding, with plans ranging from significant cuts to their services and headcount to plans for closure. For example, a childcare provider associated with head start reported having available liquidity that will provide for one week of payroll but, without additional funds, will soon lay off staff and cease provision of nearly 1,000 childcare slots.
Overall business activity across the District remained unchanged over the last month. Manufacturing activity continued to contract modestly, but that contraction was offset by a slight rise in professional services activity. On average, contacts in manufacturing sectors anticipated slight headwinds for demand in the coming year from changes in trade policy, but a small share of firms expected demand to rise. In contrast to the mix of views on the outlook for demand, nearly all contacts expected recent trade policy shifts will push their costs higher or significantly higher. Most business contacts reported a limited exposure to government contracts, but recent disruptions in federal funding have resulted in payment delays for some District manufacturing firms. Capital outlays were slightly below scheduled expenditures in recent weeks as several contacts reported delaying, though not deviating from, planned equipment investments. The outlook for capital expenditures remained positive, yet expectations were softer than reported a couple of months ago.
Development and construction activity in commercial real estate picked up modestly outside of the office segments of the sector. Completions of retail facilities and hotel upgrades and modifications also accelerated in recent weeks. Developers indicated the number of contractor bids for projects rose, and contractors reported subcontractors and workers were more available to support new work. Contacts in residential real estate construction noted escalation clauses were much more commonly part of negotiations in recent weeks as builders and investors each sought protections from anticipated materials cost growth in lumber and metals, which they attributed to changes in trade policy. Similarly, lenders reported they became more attentive to risks associated with potential increases in materials costs during their underwriting process.
Loan demand was mostly unchanged at District banks, although several bankers noted demand for residential mortgage loans continued to wane. Credit standards were unchanged across lending categories and loan quality remained relatively stable. Respondents indicated real estate taxes and insurance expenses increased significantly over the last year. Thus far, these additional expenses have had only a modest impact on overall borrower repayment capacity. Bankers noted high inflation, repricing risk for loans maturing in a higher rate environment and impacts from tariffs as the most prominent potential downside risk factors that could affect loan quality over the next six months. Conversely, contacts highlighted overall economic expansion and lower interest rates as potential factors that could improve loan quality over the same period. Deposit levels remained stable, while respondents noted a continued shift to certificate of deposit accounts.
Tenth District oil and gas activity was flat over the last month, but sentiment remains optimistic. The number of active oil rigs in the District was mostly unchanged as oil prices remain rangebound above contacts’ breakeven price but below the price needed to substantially increase drilling. The number of active gas rigs ticked down slightly in recent weeks, despite higher spot prices driven by strong natural gas demand from cold winter weather and related power demand. Contacts are optimistic heading into 2025 as they are developing promising new plays in Oklahoma’s Anadarko Basin and Wyoming’s Niobrara Basin. Coal production in Wyoming is up slightly from last month but remains below 2024 levels despite price increases last year.
Conditions in the Tenth District agricultural economy improved slightly but remained relatively weak. Crop prices increased moderately in January, but profit opportunities were still narrow. Strong cattle prices continued to support profits among producers, however, low cattle inventories have been a challenge for beef processors. Contacts in several industries cited recent developments related to trade policy as a key concern, noting the potential for price volatility and uncertainty about the stability of current trade relationships. Those concerns about trade policy weighed on reported sentiment overall, but contacts noted the planned ad hoc assistance associated with the American Relief Act will provide broad support to the farm sector that could mitigate financial stress for some producers.