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St Louis: June 2021

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Beige Book Report: St Louis

June 2, 2021

Summary of Economic Activity
Contacts reported that economic conditions have moderately improved since our previous report, although growth was robust in some sectors. Many contacts described a situation in which growth in demand for their products or services is outpacing their growth in capacity. Contacts cited product and material shortages and low staffing levels as key constraints. Many supply chain issues also stemmed from labor shortages at suppliers' facilities. Contacts remained optimistic and expect these constraints to subside beginning in the fall. On net, 48 percent of contacts expect economic conditions during the remainder of 2021 to be better or somewhat better than the same period one year ago.

Employment and Wages
Employment has increased modestly since our previous report. Contacts across industries reported hiring to meet higher demand. Many, however, noted shortages for both skilled and unskilled labor. One St. Louis job fair, held by a dozen restaurants to fill more than a hundred positions, drew barely a dozen applicants. Contacts attributed this scarcity to increasing demand for labor in other sectors, unemployment benefits, and workers' healthcare and childcare concerns; one manufacturer, so affected by childcare difficulties, planned to use federal aid funds to address the issue. Many firms reported difficulty maintaining employee morale and engagement. A high-end restaurant owner reported only a single employee who never came in late or missed a shift in a month after offering a $1000 bonus for doing so. Some firms turned to automation; one manufacturer reported doing so after seeing a 70% turnover rate in new hires.

Wages have increased moderately. Employers specifically reported increasing starting wages and sign-up bonuses to attract new hires, though small firm wages remained more stagnant. One restaurant owner reported that raising his starting wage has drawn interest from prospective workers—when he can find any to talk to.

Prices have increased moderately overall since our previous report, but prices in some sectors such as automobile retailing and construction have increased sharply due to transitory supply chain constraints and a spike in consumer demand. Contacts across industries reported increased delivery costs and long lead times for input materials. Several auto dealers reported strong increases in new and used vehicle prices, depending on the age and mileage of the vehicle. These contacts attribute the price increases to high demand and a reduced supply due to input shortages; however, these prices are expected to stabilize before the end of the year. A manufacturing contact reported increased input costs for fuel, acrylic, wood, and metals. Steel prices have increased moderately since our previous report and robustly year over year. Lumber prices have declined since our previous report but remain elevated relative to one year ago. A contact from a regional refinery reported that oil prices have stabilized at a higher level than expected. Several contacts in the construction industry reported increased material supply prices. Contacts in the retail and commercial real estate industries reported lower sales prices.

Consumer Spending
Consumer spending activity has increased strongly since our previous report. General retailers reported increased sales over the past six weeks and an overall improved outlook, citing federal aid to households, vaccinations, and pent-up demand. Auto dealers reported that sales over the past six weeks were about the same or slightly higher than the previous 6 weeks, although the outlook for sales for the coming quarter was mixed. Dealerships described the impact of stimulus checks as "massive" and "ongoing." Hotel occupancy is up, but the number of rooms available is down due to labor shortages. A contact noted that parents who have not spent much on experiences for their children are ready to start spending now that social distancing restrictions have been relaxed.

Manufacturing activity has strongly increased since our previous report. Survey-based indices suggest that production, capacity utilization, and new orders have strongly increased. Some firms are experiencing large order backlogs as supply chain issues and labor shortages have constrained production. Several contacts in the region noted that Winter Storm Uri caused disruptions in the supply of plastics coming from the Gulf Coast. Contacts also reported that they are struggling to find and maintain employees due to competition with other industries, especially as COVID-19 restrictions are lifted. On average, firms reported they expect strong increases in production, capacity utilization, and new orders in the third quarter, but remain pessimistic about supply-chain disruptions in the next few quarters.

Nonfinancial Services
Activity in the nonfinancial services sector has increased slightly since our previous report. About two-thirds of contacts indicated that sales met or exceeded expectations during the second quarter. Airport passenger traffic has increased by 10% since our previous report, but only to around two-thirds of May 2019 levels. One logistics contact mentioned that low inventories have increased demand for their services. The recent pipeline cyberattack disrupted trucking shipments to the northeast. A crack in the Interstate 40 bridge connecting Memphis to Arkansas disrupted auto and barge traffic in May. Several healthcare contacts reported lingering issues from COVID-19, such as higher input costs and tighter hospital budgets. An IT service contact reported a slowdown in new projects due to difficulties connecting with new clients.

Real Estate and Construction
Residential real estate activity remains unchanged since our previous report. Inventory levels remain extremely low and the median number of days a house is on the market continues to fall. Contacts reported that low interest rates and pent-up demand from the pandemic are continuing to drive demand for homes. Home building has slowed due to supply chain issues. In addition, suppliers have extended lead times on appliances and some finished building products. Builders are also waiting to list houses until they are complete, to adjust for materials' price volatility. Several contacts reported that these changes in costs are causing clients to reconsider or cancel projects.

Commercial real estate activity remains mixed across different sectors. Industrial real estate activity remains unchanged, with high demand from e-commerce distribution facilities. Demand for office and retail spaces remains low, but contacts speculate that the return of some office workers as well as increased retail spending will lead to improvement. Contacts reported that supply shortages and price volatility may lead to delays or cancellations of projects. However, industrial construction projects are expected to continue despite these issues.

Banking and Finance
Banking conditions have improved slightly since our previous report. Many bankers highlighted high asset quality, ample liquidity, and record earnings in the first quarter of 2021. Most contacts anticipate mortgage business and PPP loan income to increase their earnings. Compressed net interest margins continue to be a concern. Contacts reported a modest increase in overall loan demand. Commercial and industrial (C&I) loan demand rose slightly, while consumer loan demand, particularly for auto loans, increased moderately. To offset higher used car prices, many lenders have decided to stretch out terms on auto loans to make financing more affordable. Delinquency rates remained low, although some lenders started to see a slight uptick in C&I delinquencies in recent months.

Agriculture and Natural Resources
Agriculture contacts remain optimistic about current conditions overall. Most agriculture contacts surveyed reported that their sales thus far have met expectations. Supply chain issues are raising many producers' costs, although higher commodity prices have helped generate higher incomes, maintaining profit margins. One contact indicated that government support has been strong in the sector. The percentage of row crops planted has increased since the previous reporting period and is up slightly from this time in 2020. Progress of acres planted is up slightly to moderately this year for every crop of the District states; only Indiana is behind their 2020 progress to this point. This optimism extends to the outlook as well, as contacts reported that their outlook for the rest of 2021 has improved somewhat.