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St Louis: January 2022

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Beige Book Report: St Louis

January 12, 2022

Summary of Economic Activity
Economic conditions have improved moderately since our previous report. Employers continue to report difficulty hiring enough workers to meet consumer demand, with some industries with a high degree of direct consumer contact forced to limit or cut back operating capacity due to staffing shortages. Significant wage pressures persist across most industries. Increases in raw material and transport costs contributed to moderate to strong cost pressures, most of which firms were able to pass along to consumers. The real estate sector remained strong; supply chain issues continued to limit construction but activity was higher than typical seasonal levels. The COVID-19 Omicron variant contributed to labor shortages and sparked some concern about the short-term outlook in the hospitality, transportation, and retail sectors.

Employment and Wages
Employment has increased modestly since our previous report. District contacts reported that widespread attempts to hire have been hampered by widespread worker shortages. Many firms, unable to find adequate staff, have been unable to grow or have had to actively cut back their operations. This was especially true for high-customer-contact industries, like dining and retail. St. Louis cut back its public transportation services despite holding job fairs, enticing retired operators back to work, and—in the words of the supervising CEO—"literally begging for employees." Firms across industries reported increasing flexibility and benefits to entice scarce workers. Some also used automated processes as a substitute for workers. Several firms delayed their return-to-office timelines in the face of the Omicron variant.

Wages continue to grow strongly, particularly for traditionally low-wage positions. One Little Rock restaurant reported paying its dishwashers $13 per hour and skilled kitchen staff $16 per hour or more, and an Arkansas manufacturer reported plans to soon increase its starting wage by more than 10 percent.

Prices have increased moderately since our previous report. Contacts in the hospitality industry reported increasing costs since our previous report and are passing along most of it to customers. A contact from a jewelry retail store reported higher input costs and noted plans to increase prices charged to consumers. Furniture retail industry contacts reported slightly increased cost pressures and prices charged to consumers. Some contacts plan to reduce profit margins rather than pass the full extent of cost increases on to their customers. An auto retail contact reported no change in costs and prices since our previous report. A contact reported slightly lower freight costs since our previous report but also that freight costs remain higher than before the COVID-19 pandemic. Raw materials prices have increased modestly overall since our previous report.

Consumer Spending
District general retailers, auto dealers, and hospitality contacts reported moderately higher business activity since our previous report. Consumer sentiment in West Tennessee regarding current conditions has worsened since September, but future expectations have improved. General retailers reported higher business activity and a mixed outlook for the next quarter, citing ongoing supply chain and pricing issues. Roughly 39 percent of consumers in Tennessee reported the majority of their holiday shopping was online this year, down from 53 percent of consumers last year. A St. Louis auto dealer reported that business activity is about the same as November; however, there is little clarity regarding future inventory. A restaurant in Arkansas noted that, since they no longer have restricted occupancy, they are anticipating increased sales; but they noted the increases in new COVID-19 cases remains a downside risk, especially given tight staffing. Hospitality contacts reported higher business activity month-over-month and year-over-year but a mixed short-term outlook due to the Omicron variant.

Manufacturing activity has increased modestly since our previous report. Firms in both Arkansas and Missouri reported modest upticks in new orders and production, although the monthly rate of growth has slowed. Supply chain issues and labor shortages have increased input prices and continue to put pressure on firms' profit margins and service windows. With the passing of the Infrastructure Investment and Jobs Act, firms expect construction, and therefore demand for manufactured inputs, to increase in 2022. Firms also continue to explore automated substitutes for various aspects of the manufacturing process.

Nonfinancial Services
Activity in the nonfinancial services sector was unchanged since our previous report. Airport passenger traffic decreased slightly as rising COVID-19 cases among workers have resulted in large numbers of flight cancellations. Airport cargo traffic has increased slightly since our previous report, although it is down roughly 5 percent relative to this time last year. Memphis and St. Louis area hospitals are dealing with increases in COVID-19 patients with the Omicron variant. In addition to the human toll, the tornado event in the District on December 10 and 11 disrupted transportation through road closures and damage to infrastructure.

Real Estate and Construction
The residential real estate market has remained strong since our previous report. Home prices are still elevated. In Memphis, they are up 21 percent since this time last year. One contact noted that there has not been the typical drop in demand during the winter months. Inventory remains extremely low across the District, and one Memphis contact had 14 offers in the first 24 hours a house was on the market. However, the median number of days a house remains on the market has increased slightly since our previous report. While most expect the strong real estate market to continue into 2022, a contact expressed concern that any significant hikes in interest rates will impact demand from buyers.

Apartment rental rates were mixed but remain relatively stable since our previous report, with Little Rock and Memphis decreasing slightly and Louisville increasing slightly. All apartment rental rates in the largest District MSAs remain significantly higher than this time last year. Residential construction has remained strong since our previous report but continues to struggle with supply chain issues and increased costs. A Little Rock contact reported that, in spite of these problems, optimism remains high and new development continues.

Banking and Finance
Banking conditions have improved slightly since our previous report. District banks reported an increase in overall lending activity since the last period. Business loans, especially commercial, industrial, and commercial real estate loans, increased slightly while consumer and residential real estate loans increased moderately. Deposit levels remained high but growth moderated. A contact in Little Rock noted that the rate of forgiveness for PPP loans has risen through the previous quarter and predicted that the balance will be near zero by the middle of 2022. The outlook for 2022 among bankers is cautiously optimistic, as they expect loan growth across all divisions.

Agriculture and Natural Resources
District agriculture conditions remain relatively unchanged since our previous report. The percentage of winter wheat in the District rated fair or better modestly increased from the end of October to the beginning of December, rising from 91 percent to 95 percent. This is a moderate increase over this period last year. While contacts in the District are optimistic after a profitable year due to elevated commodity prices, they are also concerned about increased costs for fuel, fertilizers, and other inputs potentially affecting their crop production next year.

Natural resource extraction conditions improved slightly from October to November, with seasonally adjusted coal production increasing just over 1 percent. November production was up significantly compared with a year ago, increasing nearly 20 percent.