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St Louis: March 2021

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Beige Book Report: St Louis

March 3, 2021

Summary of Economic Activity
Reports from contacts indicate that economic conditions have been generally unchanged since our previous report. Firms continue to report mixed changes in employment levels. Firms reported difficulties attracting candidates for positions despite increasing wages. Inflation pressures have increased, as contacts reported moderate increases in prices; however, most contacts believe it will be difficult to pass on further price increases. Overall, contacts' outlooks continued to improve and are generally optimistic. Most cited a high degree of uncertainty about the pace of recovery, which related primarily to the pace and efficacy of vaccinations.

Employment and Wages
Employment trends have been mixed since the previous report. On net, 12 percent of respondents reported employment levels lower than a year ago. Contacts noted stagnant or declining employment, especially among small businesses and leisure and hospitality firms, with continuing closures in a slower-than-expected recovery. Transportation and manufacturing firms reported their desire to expand their workforce has been stymied by a scarcity of workers. Many contacts ascribed this scarcity to unemployment benefits and other government aid: A grocery store contact expects some warehouse workers will quit when they receive another stimulus check, looking to return to work at a later time. Some reported turning to automation, with one contact emphasizing that robots were doing jobs for which they couldn't find workers. COVID-19 exposure has also depressed existing workers' hours: One manufacturer reported more than 10 percent of his workforce was quarantined on any given day.

Wages grew slightly. On net, 23 percent of respondents reported wages higher than a year ago. Many contacts emphasized the need to raise wages while workers remained scarce; some, however, reported more stagnant wages, especially in the worst-hit sectors. One restaurant owner reported recently giving his workers much-delayed raises, fearing they would otherwise be lured away by other businesses as the recovery continues.

Prices charged to consumers have increased moderately since our previous report. However, contacts believe they have less ability to further increase prices. A regional grocer reported lowering some prices due to competitive pressures and making up profits on higher volumes. A restaurant contact reported an inability to increase prices amid already slow business. A supplier for a contact in the graphic design industry unexpectedly increased the prices for paper and packaging products. Multiple contacts noted the price of silver has increased. A contact in the jewelry industry reported this increase will lead to higher prices to consumers but is allowing customers to switch to brass. A manufacturing contact noted the increase in silver prices has increased the costs of producing its antimicrobial products. Contacts also noted that ocean freight costs have more than doubled, which a warehouse contact believes will lead to higher prices for consumers. A retail industry contact is passing increased shipping costs to consumers. Contacts also reported higher steel and soft-lumber prices since our previous report. A warehouse contact expects the elevated price of steel to increase the cost of maintenance and replacement for the company's forklift fleet.

Consumer Spending
Reports from general retailers, auto dealers, and hospitality contacts indicated that consumer spending has been mixed since our previous report. General retailers reported sales met or fell short of expectations over the past six weeks, but they have an improved outlook for the coming quarter due to vaccines and stimulus payments. A local furniture store reported that sales increase the same weekend that customers receive stimulus checks. Auto dealers reported that sales over the past six weeks generally fell short of expectations. The outlook for auto sales for the coming quarter was mixed, with contacts citing stimulus, low inventories, and interest rates as determining factors. Restaurants continue to struggle. A local restaurant owner expects conditions to hold steady until at least the third quarter. Hospitality contacts reported low business activity but remain optimistic that when vaccines are widely distributed the industry will recover quickly.

Manufacturing activity has modestly increased since our previous report, though the change from firm to firm varied considerably. Contacts reported that production and capacity utilization remained unchanged, while new orders have modestly increased. However, some firms reported strong upticks in production and new orders. Several firms in the region reported labor force shortages have inhibited production. Beyond that, auto manufacturers in the region reported the semiconductor shortage has led to temporary production shutdowns. On average, firms reported they expect moderate increases in production, capacity utilization, and new orders in the second quarter. One salt products manufacturer in the region reported the expected closure of a mine poses future supply chain challenges.

Nonfinancial Services
Activity in the nonfinancial services sector has decreased slightly since our previous report. Passenger traffic at regional airports remains depressed, down 60 percent from one year ago. Half of all nonfinancial services contacts reported sales below expectations this quarter, reflecting clients who are cautious to spend due to uncertainty about the near-term economic recovery, as well as pandemic-related difficulties meeting new clients. Revenues at several small regional colleges have fallen due to declines in enrollment. Logistics contacts reported first-quarter sales were stronger than expected despite the post-holiday slowdown. Most contacts expect sales next quarter to be at least as good as this quarter given vaccinations are becoming more widespread.

Real Estate and Construction
Residential real estate activity has slipped since our previous report. Pending home sales in St. Louis, Memphis, and Louisville have fallen slightly while pending sales in Little Rock have dropped sharply since early January. Contacts reported that home inventory remains low and expect it to remain so. A contact in Arkansas reported local rents are rising at an unreasonable rate.

Residential construction activity has risen this quarter, with many expecting further increases. A contact in St. Louis reported residential construction projects are severely backlogged due to labor and material shortages. Contacts also reported problems and price increases stemming from high lumber and steel prices. Also, shipping delays and production issues have increased lead times on most building supplies and appliances.

Commercial real estate activity has been mixed since our previous report, as office and retail demand are lower this quarter. A contact in Louisville reported the increase in telework has decreased demand for office space, and, going forward, contacts are uncertain if and how telework will continue to impact demand. Meanwhile, demand for industrial properties is up due to e-commerce and micro-fulfillment facilities. Commercial construction is similarly mixed, as multi-family projects, warehouses, and logistics facilities are the main projects currently being built. Some developers also reported switching hotel projects for apartment buildings.

Banking and Finance
Banking conditions have been unchanged since our previous report. Banking contacts continued to report a slight decrease in overall loan demand. Consumer loan demand declined modestly, particularly for credit cards, while commercial and industrial (C&I) loan demand rose slightly. Low loan demand, combined with consistently high deposit levels, further increased reserves held at District banks. A contact reported trying to deploy excess funds through bond purchases but faced challenges as bonds were harder to obtain due to high demand. Overall delinquencies decreased primarily in auto and C&I loans. All bankers contacted expect this year to be a relatively slow year but hope activity will pick up toward the end of 2021.

Agriculture and Natural Resources
Agriculture conditions have improved moderately relative to the previous reporting period. The number of acres of winter wheat planted this season throughout the District increased sharply relative to the previous year, although acres planted declined slightly in Kentucky. Despite pessimism in early 2020, farmers expressed optimism after a strong finish in 2020, with prices and sales up well above what was expected.