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St Louis: May 2018

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Beige Book Report: St Louis

May 30, 2018

Summary of Economic Activity
Economic conditions in the District have improved slightly since our previous report. Firms reported slight increases in employment despite continued difficulties finding workers. Wages and nonlabor costs increased at a moderate pace. Prices and price pressures grew modestly. Reports from consumer spending contacts were mixed. Manufacturers reported declines in production, capacity utilization, and new orders. Contacts in nonfinancial services indicated modest growth across their sectors. Residential real estate contacts reported sluggish sales resulting from low inventories and slightly lower demand, while construction activity increased modestly. District bankers reported slightly weaker demand and a decline in the creditworthiness of loan applicants. Agriculture conditions improved modestly. Overall, the outlook among contacts weakened somewhat but remains optimistic. On net, 27 percent of contacts expect conditions in 2018 to be better or somewhat better than in 2017.

Employment and Wages
Employment has increased slightly since the previous report. Of the contacts surveyed, on net, 13 percent reported that second-quarter employment was higher or slightly higher than a year ago. Several firms across a variety of industries announced plans to expand and hire new employees, including manufacturers of chemical products, wood products, and primary metals. Contacts in Missouri and Arkansas also reported difficulties filling skilled technical and engineering positions. Some local employers have begun relaxing drug-testing standards and reducing restrictions on hiring convicted felons in order to alleviate labor shortages.

Contacts reported moderate wage growth since the previous report. On net, 51 percent of contacts reported wages were higher or slightly higher than a year ago, and 43 percent reported increases in labor costs. Several contacts noted that the tight labor market has exerted upward pressure on wages for both entry-level and skilled positions.

Overall, prices charged to consumers increased at a modest pace. On net, 31 percent of contacts reported that prices were higher than a year ago. This is higher than three months ago, indicating an increase in growth from earlier this year.

Nonlabor input costs rose modestly, though at a slower pace than the previous survey three months ago. On net, 29 percent of contacts reported that costs were higher than a year ago. Multiple contacts noted that construction costs increased. In particular, a contact in Little Rock reported a strong increase in lumber prices, and several contacts in Louisville reported that the proposed steel and aluminum tariffs caused metals prices to rise. Automotive and corrugated products manufacturers also reported increases in raw materials prices.

Commodity price movements were mixed. Sorghum and soybean prices decreased modestly; coal, corn meal, cottonseed, rice, and soybean meal were flat; and corn, corn feed, cotton, and wheat prices increased modestly.

Consumer Spending
Reports from general retailers, auto dealers, and hoteliers indicate mixed consumer spending activity. Real sales tax collections increased in Arkansas and Tennessee relative to a year ago, remained flat in Missouri, and declined in Kentucky. Reports on sales from general retailers were mixed. On net, 40 percent of auto dealers indicated that sales were below expectations in the second quarter. About the same net percentage noted a shift in demand toward used vehicles. Hospitality and tourism contacts in Missouri reported business activity that met or exceeded expectations and have a positive outlook for the next few months.

Overall manufacturing activity has declined slightly since our previous report. Most contacts reported that production, capacity utilization, and new orders were down in the second quarter relative to one year ago, with greater shares reporting declines in production and new orders than in our previous survey. The percentage of contacts reporting increases in new orders has fallen for over a year. However, contacts were more optimistic about the next quarter.

Nonfinancial Services
Activity in the service sector has expanded modestly since the previous report. Transportation and service contacts generally reported that sales met expectations in the current quarter. On net, 23 percent of contacts reported higher dollar sales in the current quarter than this time last year, and 43 percent expect sales to be higher in the next quarter relative to the same time a year ago.

Real Estate and Construction
Residential real estate activity has declined slightly since the previous report. Seasonally adjusted home sales dipped slightly in March across the four major MSAs in the District. On net, a third of contacts reported that sales halfway through the second quarter have fallen short of expectations. Contacts attributed this shortfall to a decline in inventory and a slight drop in demand relative to the same time last year. However, demand is expected to return to year-ago levels in the third quarter.

Residential construction activity has increased modestly since the previous report. There was a moderate uptick in March permit activity across most of the District's MSAs. On net, only 10 percent of contacts reported that residential construction increased in the second quarter compared with a year earlier, but around twice that number expect activity to increase in the coming quarter.

Commercial real estate activity improved slightly. Local contacts, on net, reported increased demand for industrial and office properties relative to a year ago. They also state that inventories for both property types have declined. These trends are expected to continue into the third quarter.

Commercial construction activity improved modestly. On net, contacts reported higher demand for construction of all property types and noted that inventories for industrial and retail property types have improved. The majority of contacts continued to have an optimistic outlook for the remainder of 2018.

Banking and Finance
Banking market conditions in the District have weakened slightly since the previous report. Banking contacts reported that demand for mortgage and auto loans fell modestly in year-over-year terms while demand for business loans was flat. Bankers also reported that the creditworthiness of loan applicants declined relative to last year, particularly among applicants for auto loans and credit cards. Delinquencies fell across all loan categories but to varying degrees; mortgage and auto loan delinquencies dropped slightly, while delinquencies on business loans and credit cards decreased at a moderate rate.

Agriculture and Natural Resources
District agriculture conditions improved modestly from the previous reporting period and robustly from the same time last year. After contacts reported concerns about weather being too wet and cold for a strong early planting season, mid-May planned acreage planted for corn, cotton, and soybeans were, respectively, 13, 12, and 24 percentage points above the same time last year. Rice planting progress was slightly behind 2017. Contacts indicated that the prospective Chinese tariffs on U.S. soybeans would be damaging to exporters but at this point seemed unlikely.

Natural resource extraction conditions were roughly unchanged from the previous report and year. Seasonally adjusted coal production fell 1 percent from March to April, and April production was also down 4 percent from the same month last year.

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