Beige Book Report: St Louis
November 29, 2017
Summary of Economic Activity
Economic conditions in the District have improved at a modest pace since our previous report. Labor market conditions remain tight as most firms reported raising starting wages and salaries as a way to attract new workers. Reports on consumer spending were somewhat weak, and reports from other nonfinancial service firms were mixed. Manufacturing contacts reported slight growth, and banking conditions improved moderately. The outlook among District firms surveyed in mid-November was generally optimistic. On net, 49 percent of contacts expect District economic conditions in 2018 to be better or somewhat better than 2017. This outlook was slightly weaker than the outlook from the mid-August survey, but it is a modest improvement from the outlook one year ago.
Employment and Wages
Employment has increased modestly since the previous report. Of the business contacts surveyed in early November, on net, one-third of contacts reported that employment was higher or slightly higher than a year ago. Of those hiring, over half expect to increase their firm's employment over the next year, while 40 percent expect to hire only to replace departing workers. Contacts cited growth of sales, a need for skills not possessed by their current staff, and overworked staff as the top factors for hiring. Contacts cited an inability to find workers with the required skills as a key factor restraining hiring plans, behind only a desire to keep operating costs low.
Contacts have reported moderate wage growth since the previous report, as tightness in the labor market has resulted in upward pressure on wages. On net, 61 percent of contacts reported wages were higher or slightly higher than a year ago, and 68 percent reported increases in labor costs. Nearly 80 percent of those hiring reported raising starting wages or salaries to attract new hires, while about two-thirds reported raising wages or salaries to retain existing employees.
Prices
Price pressures have continued to increase modestly. Overall, prices charged to consumers increased slightly, but the pace of growth slowed during the fourth quarter. On net, 15 percent of business contacts reported that prices charged to customers were higher than a year ago. Conversely, growth in non-labor costs was moderate. On net, 45 percent of contacts reported that costs were higher than a year ago.
Multiple contacts in Louisville reported rising construction costs, and a Memphis contact noted a significant increase in lumber prices. In the energy sector, coal prices increased moderately.
Consumer Spending
Reports from general retailers, auto dealers, and hoteliers indicate consumer spending has slightly declined since our previous report. Although October real sales tax collections increased in Kentucky and Tennessee, they decreased in Missouri and Arkansas. Multiple auto dealers reported a decline in sales, which have failed to meet their expectations during 2017. Memphis and Louisville dealers noted a shift in demand away from used vehicles. Reports from hospitality contacts were mixed.
Manufacturing
Manufacturing activity has increased slightly since our previous report, although the pace of growth has continued to slow. In a recent survey, contacts reported that production and capacity utilization were unchanged in the fourth quarter relative to one year ago, while a slight majority on net reported an increase in new orders. The results are down from this time last year, when over half of contacts on net reported increases in production and capacity utilization and over one-fourth reported increases in new orders. Contacts are also less optimistic about the next quarter, with only around 10 percent on net expecting increases in production, capacity utilization, and new orders, compared with over three-fourths expecting increases in all three areas at this time last year. Despite the weaker outlook, several companies reported new capital expenditure and facility expansion plans, including firms that manufacture transportation equipment and food products. In addition, some contacts reported supply disruptions as a result of hurricanes, and other contacts expressed concern about a slowdown in the auto industry.
Nonfinancial Services
Conditions in the service sector weakened from the previous period, but remain positive on net. Reports of fourth-quarter sales were mixed. About one-third of contacts reported higher dollar sales in the current quarter than this time last year; however, one-third reported lower dollar sales. Despite mixed sales reports, about two-thirds of transportation and service contacts reported that sales met or exceeded expectations. Over half of contacts expect sales to be higher in the next quarter than they were last year. Firms that provide information technology services reported plans to expand facilities and hire employees. Reports from the healthcare sector indicate modest growth since the previous period. Healthcare contacts report that heightened uncertainty surrounding policy decisions over the past year has become an operating norm, and some providers are moving forward with small capital expansions.
Real Estate and Construction
Residential real estate activity has remained unchanged since the previous report. Seasonally adjusted home sales for September were flat relative to the previous month across the District's four largest MSAs. Local contacts continued to report that shortages in inventory have hindered sales; on net, about one-quarter of contacts reported that sales have fallen short of expectations halfway through the fourth quarter.
Residential construction activity improved modestly. September permit activity increased moderately relative to the prior month. However, few contacts indicated that construction activity has increased compared with a year ago. Local contacts continued to report that a shortage of labor is preventing homebuilders from meeting demand.
Commercial real estate activity has improved modestly since the previous report. Contacts reported relatively strong demand for most property types, particularly office and industrial. These trends are expected to continue into the first quarter of 2018.
Commercial construction activity remained flat. Several Memphis contractors continued to report optimism regarding future projects. New multifamily construction continued, and contacts indicated that the level of activity has been the same relative to a year ago. New hotel development also continued in the major MSAs. Similar to residential markets, contacts reported labor shortages negatively impacting activity.
Banking and Finance
Banking conditions have improved at a moderate pace since the previous report. Banking contacts reported overall loan demand increased moderately relative to last year; however, the pace of loan growth continues to steadily slow. Demand for auto loans declined for a second straight quarter, though bankers anticipate that auto lending standards could loosen modestly next quarter. Mortgage demand expanded at the fastest rate among major loan categories, while demand for business lending was unchanged relative to year-ago levels. After trending up the past few quarters, delinquencies declined moderately across all loan types. District banks are expanding the geographic market areas they serve as competitive pressures from other lenders continue to increase.
Agriculture and Natural Resources
Agriculture conditions have improved moderately since the previous reporting period, although farmers continue to struggle with low crop prices. Expected yields for corn, cotton, rice, and soybeans were all higher in mid-November than they were in mid-October. The mid-November expectations were also higher than realized levels in 2016. Expected corn yields saw the largest improvement, with November expectations 3 percent above October expectations. Contacts concurred with the projections for all four crops, noting that there will be record yields in a lot of areas.
Natural resource extraction conditions declined slightly from September to October, with seasonally adjusted production declining a half a percent. October production was also down 3 percent from a year ago.
For more information about District economic conditions, visit: www.research.stlouisfed.org/regecon/