Beige Book Report: St Louis
May 31, 2017
Summary of Economic Activity
Economic conditions have continued to expand at a modest pace since our previous report. District labor market conditions continue to improve, with modest employment growth and moderate growth in wages. Reports from retail contacts paint a mixed picture on consumer spending, with signs of weakening auto sales but positive reports from non-auto contacts. Manufacturing contacts generally reported increases in new orders. Real estate contacts reported that low inventories and higher construction costs continue to reduce home sales and push up prices, while banking contacts reported strong growth in the demand for mortgages. In general, business contacts surveyed in mid-May continued to hold an optimistic outlook for growth in 2017. On net, 55 percent of contacts expect District economic conditions in 2017 to be better or somewhat better than last year. This outlook was generally unchanged since contacts were surveyed in mid-February.
Employment and Wages
Employment has increased modestly since the previous report. Of the business contacts surveyed in mid-May, on net, 31 percent reported that second-quarter employment was higher or slightly higher than a year ago and 40 percent expect third-quarter employment to be higher or slightly higher than a year ago. Contacts continued to report difficulties finding skilled or motivated employees. Construction contacts in St. Louis, Louisville, and Memphis reported shortages of workers, with a contact in Louisville noting that the shortage has affected their ability to complete work.
Contacts reported moderate wage growth since the previous report. On net, 61 percent of contacts reported wages and labor costs were higher or slightly higher than a year ago; however, a slightly smaller share expect increases in the third quarter. Contacts in construction, manufacturing, and banking reported increasing wages to retain and attract employees. However, a contact in Louisville noted that a shortage of workers in information technology has not resulted in increased wages. In addition, depressed agriculture prices have kept wage increases to a minimum in eastern Arkansas.
Prices
Price pressures in the District were moderate. Business contacts surveyed reported that prices charged to consumers and non-labor input costs increased moderately. Contacts reported prices and non-labor costs were slightly higher or higher than a year ago. Contacts also reported that healthcare costs have increased moderately.
House prices increased moderately. Real estate contacts reported that high costs of residential construction are pushing house prices higher and lack of construction labor is pushing up costs of commercial construction projects. Contacts reported increasing costs of raw materials. In particular, prices of lumber, concrete, and sheetrock have increased more than expected.
Contacts in the agriculture sector in Memphis and St. Louis reported that lower crop prices continued to negatively affect their business. Since the previous report, cash prices of wheat and corn decreased moderately. However, prices for sorghum and cotton have increased moderately and the price of soybeans increased slightly, while rice and coal prices did not change.
Consumer Spending
Reports from general retailers, auto dealers, and hoteliers portray a mixed picture of consumer spending activity. General retailers reported moderate sales growth, although contacts in Arkansas and Missouri reported year-over-year declines in April sales tax collection. Sixty-three percent of surveyed auto dealers reported a reduction in year-over-year sales halfway through the second quarter. On net, 50 percent expect this negative growth to continue into the next quarter. Hospitality contacts in St. Louis and Louisville indicated a modest increase in business activity after a slow first quarter.
Manufacturing
Manufacturing activity has increased at a moderate pace since our previous report. Several companies across a broad range of industries reported capital expenditure and facility expansion plans, including firms that manufacture textiles, nonmetallic mineral products, transportation equipment, and food products. In a recent survey, contacts reported continued improvement in manufacturing conditions. The majority reported that production, new orders, and capacity utilization increased in the second quarter relative to one year ago. The results are generally unchanged from our previous survey in mid-February. Contacts were generally optimistic about the third quarter, with 65 percent, on net, expecting further growth in production, new orders, and capacity utilization. Despite the optimistic outlook, some contacts expressed concerns about regulatory uncertainty and the difficulty of finding employees.
Nonfinancial Services
Reports from the service sector have been positive since the previous report. More than two-thirds of transportation and service contacts reported that sales met or exceeded expectations in the current quarter. On net, 25 percent of contacts expect sales to be higher in the next quarter than they were at that time last year. Firms that provide transportation, utility, and information technology services reported plans to expand facilities and hire employees. Reports from healthcare firms remain mixed. One major hospital announced layoffs in the Louisville area, citing uncertainty around healthcare reform and low patient volumes. Another healthcare provider cited high costs as a reason for lower-than-expected sales over the past quarter. Other healthcare providers in Louisville and Memphis announced expansions.
Real Estate and Construction
Residential real estate activity has declined modestly since the previous report. Home sales remained flat or decreased in the District's largest metro areas. Several contacts reported that significant shortages in inventory have hindered sales, particularly in Louisville, as single-family demand has continued to be strong. Local inventory levels are mostly expected to decline further in the coming months. Some contacts noted a beneficial impact from a slight decrease in mortgage rates.
Residential construction improved modestly since the previous report. On net, 40 percent of contacts reported a slight increase in residential construction relative to the same time last year and about the same fraction expect this trend to continue through the third quarter.
Commercial real estate activity has also improved modestly since the previous report. Contacts continued to indicate an increase in demand for both office and industrial properties compared with the same time last year. Meanwhile, most contacts reported no change or a slight increase in multifamily property demand and no change or a slight decrease in retail property demand.
Commercial construction activity remained robust. Local construction contacts reported relatively no change to demand across most property types. Some contacts noted an increase in multifamily and industrial building.
Banking and Finance
Banking conditions continued to strengthen at a moderate pace, driven primarily by strong growth in demand for business and mortgage loans. Demand for auto loans was flat over the period and is expected to remain level over the coming quarter, while overall loan demand is expected to grow at a moderate rate. The creditworthiness of applicants for agriculture loans worsened for a third straight quarter; credit standards for agricultural lending increased relative to a year ago and are expected to continue tightening in the near term.
Agriculture and Natural Resources
Agriculture conditions deteriorated significantly due to flooding across the District. Mid-May percentages of corn and rice crops rated fair or better were down or unchanged from a year ago in every state for which data were reported. Flooding and rain also slowed planting, with planned acreage planted for corn, cotton, rice, and soybeans each below the percentages of the previous year. Cotton was the farthest off last year's planting pace.
Natural resource extraction conditions improved modestly from the previous report and year. Seasonally adjusted coal production growth was up slightly from March to April, and April production was also 14 percent above last year's level.