Beige Book Report: St Louis
March 7, 2018
Summary of Economic Activity
Economic conditions have improved at a modest pace since our previous report. Firms reported modest increases in employment, despite continued difficulties finding workers. Wages continue to increase at a moderate pace, as do non-labor costs. Price pressures strengthened, as contacts generally see a greater ability to increase selling prices. Reports on consumer spending were generally mixed, with reports of bad weather reducing foot traffic and sales. Residential real estate contacts continue to report sluggish sales due to low inventories, while commercial real estate activity was slightly better. District banking contacts reported improving loan demand. Agricultural conditions also improved, thanks to high yields giving a boost to profits. Overall, the outlook among contacts has improved. On net, 54 percent of contacts expect conditions in 2018 to be better or somewhat better than in 2017.
Employment and Wages
Employment has increased modestly since the previous report. Of the contacts surveyed in early February, on net, 28 percent reported that first-quarter employment was higher or slightly higher than a year ago. Anecdotal evidence suggests that the labor market remained tight. Construction contacts continued to report shortages in qualified labor. Technology and manufacturing contacts in St. Louis and Memphis, respectively, also reported difficulties hiring suitable employees. Contacts in Louisville and Little Rock cited candidates' inability to pass drug tests as an impediment to hiring.
Contacts reported moderate wage growth since the previous report. On net, about 70 percent of contacts reported wages were higher or slightly higher than a year ago, and a similar share reported increases in labor costs. A construction contact in Louisville cited the need for higher wages to attract and retain skilled labor, while a contact in Little Rock reported that unskilled positions remain unfilled because of low wages.
Prices
Price pressures have moderately strengthened since the previous report. Firms reported modest growth in prices charged to consumers: On net, 33 percent of contacts reported that prices were higher than a year ago. Price increases accelerated somewhat in the second half of 2017, as contacts reported that their ability to raise prices has improved over the past three to six months. One food product manufacturer reported increasing their selling prices for the first time in 5 years.
Non-labor input costs grew at a moderate pace. On net, 67 percent of contacts reported that costs were higher than a year ago. Steel prices increased moderately throughout the District, and contacts in Louisville and Little Rock reported upticks in trucking freight rates.
Commodity prices generally rose throughout the District. Wheat, sorghum, soybean meal, corn, and corn feed increased moderately, soybeans increased modestly, and coal prices increased slightly. Rice and corn meal prices were flat while cotton prices fell modestly.
Consumer Spending
Reports from general retailers, auto dealers, and hoteliers portray a mixed picture of consumer spending activity. January real sales tax collections increased in Arkansas, Kentucky, and Missouri relative to a year ago and slightly decreased in Tennessee. In addition, several general retailers in St. Louis and Louisville indicated that sales fell short of expectations, attributing the slowdown to poor weather. Conversely, hospitality contacts in St. Louis reported that sales exceeded expectations. Multiple auto dealers across the District reported a modest decline in sales, which have failed to meet their expectations. St. Louis dealers indicated a shift in demand toward high-end vehicles.
Manufacturing
There has been little to no growth in manufacturing since our previous report. A slight majority of contacts reported that new orders and capacity utilization were lower in the first quarter relative to one year ago, while production remained at the same level. This marks the fourth consecutive quarter of a decline in the share of contacts reporting growth in new orders and capacity utilization. However, the outlook of contacts remains optimistic, with most contacts expecting increases in production, new orders, and capacity utilization in the next three months.
Nonfinancial Services
Activity in the service sector has expanded moderately since the previous report. Transportation industry contacts reported that the dollar-value of sales has been higher in the first quarter compared with the same period last year. Most contacts expect sales to remain higher in the second quarter. While dollar sales are up, they have largely met expectations: More than half of contacts reported sales met expectations with remaining contacts split between falling short and exceeding expectations.
Real Estate and Construction
Residential real estate activity has declined slightly since the previous report. Seasonally adjusted home sales declined in January across the District's four major MSAs. Contacts continued to report that shortages in inventory are hindering sales. On net, about half of the respondents reported that first-quarter sales have fallen short of expectations. However, demand remains strong and a majority of contacts expect demand for single-family homes to increase over the next quarter.
Residential construction activity improved modestly. There was a modest uptick in December's permit activity within the District compared with the previous month. Two-thirds of local contacts reported that construction activity increased compared with the previous year, and the same fraction expects continued growth over the next quarter.
Commercial real estate activity increased slightly. Demand for industrial and office properties increased relative to a year ago. However, contacts noted that demand for retail properties fell while retail inventory increased. Contacts expect these trends to continue into the second quarter of 2018.
Commercial construction activity improved modestly. Local contacts reported increased demand for construction of all commercial property types. Over 80 percent of contacts, on net, expressed an optimistic outlook for 2018, but many continued to report that a shortage of labor is limiting construction activity.
Banking and Finance
Lending conditions in the Eighth District have strengthened at a moderate rate since the previous report. Loan demand increased moderately in year-over-year terms and, according to District banking contacts, there were some signs that the pace of overall loan growth may be rising after slowing in 2017. Commercial and industrial loan demand increased moderately after exhibiting flat growth last quarter. Bankers reported demand for auto credit remained unchanged after decreasing the previous two quarters. Credit standards for auto loans increased slightly. Overall, delinquencies continued declining, falling in every loan category except mortgages, which increased modestly. District bankers expect delinquencies to continue decreasing next quarter across all loan types, including mortgages.
Agriculture and Natural Resources
District agriculture conditions have improved slightly since the previous reporting period. In spite of concerns about low temperatures in early January, the percent of District winter wheat rated fair or better ticked up about a percentage point from the end of December to the end of January. Contacts expressed optimism about near-term farm income as area farmers were able to turn strong yields into profits in 2017, although some expressed concern about the downside risks of NAFTA renegotiations.
Natural resource extraction conditions declined from December to January, with seasonally adjusted coal production falling 10 percent. January production was also 11 percent down from a year ago.
For more information about District economic conditions, visit: www.research.stlouisfed.org/regecon/