Economic activity flat amid tight labor market, CRE challenges

The U.S. economy was flat in September as inflation showed signs of easing and the commercial real estate market weakened, according to the Federal Reserve's Beige Book. .Economic activity and employment increased in the Chicago and Minneapolis regions as contacts were concerned over a potential recession. Economic activity fell in the Kansas City region amid a drop in energy, agriculture and commercial real estate. ."The near-term outlook for the economy was generally described as stable or having slightly weaker growth," the Fed stated. "Expectations of firms for which the holiday shopping season is an important driver of sales were mixed.".Small bank M&A increased in the St. Louis region, with investment bankers seeking potential buyers. Commercial and industrial loan demand remained steady in the St. Louis region as rising interest rates continued to create a tight deposit market, raising the cost of funds and shrinking profit margins. ."Banking contacts saw some signs of consumer finance stress increasing but reported that overall credit risk remained moderate," the Federal Reserve said of the St. Louis region. "Many contacts expressed concern about the economic outlook due to ongoing strikes and prospects of a government shutdown, but they noted few effects were immediately apparent." .Ag conditions strengthened in the Minneapolis region as a monthslong drought eased in much of the region but continued in the eastern and northern regions. Early indications of crop production were better than expected, but third quarter farm incomes fell from the previous year..Projected farm income remained under 2022 levels in the Chicago region, while manufacturing, construction and real estate activity fell. Cattle prices increased at a slower pace than in previous weeks. "Prices for agricultural land showed signs of softening, especially for ground of lesser quality," the Fed stated. "Rising interest rates stretched farm finances given high debt levels of many operators." .Banks reported a drop in loan demand. Consumer credit quality was stable, with delinquency rates still historically low but increasing. Real estate conditions were mainly unchanged and the inventory of homes for sale remained low. Manufacturing activity was mixed, but contacts reported an improving outlook for the sector..Tight labor markets continued to loosen as most districts saw increases in overall employment and firms were less urgently hiring workers. More firms were reportedly willing to allow remote work in lieu of higher wages, reduce sign-on bonuses or other wage enhancements, or shift compensation to performance-based models. In the Minneapolis area, hiring sentiments reportedly indicated contraction in Minnesota and South Dakota while being positive in North Dakota. Staffing companies reported fewer job orders than a year ago. .Labor market conditions remained tight In the St. Louis region as employers reported a lack of qualified workers for open positions. Businesses reported softer consumer demand and more challenges in passing on input costs. In the Chicago region, businesses reported that fewer workers were changing jobs and pushing back on wage offers. ."Several districts reported improvements in hiring and retention as candidate pools have expanded and those receiving offers have been less inclined to negotiate terms of employment," the Fed stated. "However, most districts still reported ongoing challenges in recruiting and hiring skilled tradespeople.".Prices and wages increased, while financial conditions tightened. Business loan demand along with bond and equity market asset values fell while volatility increased. Business loan rates increased while standards tightened. Input cost increases slowed or stabilized for manufacturers but continued to rise for services-sector companies.. "As a result, firms struggled to maintain desired profit margins," the Fed stated. "Firms expect prices to increase the next few quarters, but at a slower rate than the previous few quarters. Several districts reported decreases in the number of firms expecting significant price increases moving forward." .Commercial real estate activity fell in the Minneapolis and Chicago regions. In the Chicago district, regional construction fell as contacts expected the slower pace of activity to continue until 2024. Fewer remodeling projects were reportedly taking place in more expensive homes.