Beige Book Report: St Louis
March 2, 2022
Summary of Economic Activity
Economic conditions have remained unchanged since our previous report. Employers reported robust wage increases and continued difficulties finding workers. Price increases were greater than expected across several industries, with supply chain issues and strong demand contributing to ongoing price pressures. Firms reported improved ability to pass on price increases and anticipate continued increases in the short term, although retailers reported signs of softening demand among lower income households. Winter weather, labor shortages, and Omicron COVID-19 disruptions led to decreased activity in the transportation and hospitality sectors. The real estate sector remained strong; although supply shortages continue to affect construction, demand for commercial and residential space is high throughout the District.
Labor Markets
Employment has increased slightly since our previous report; on net, 5 percent of contacts reported increasing employment since last year. Firms continued to report a shortage of workers, with some contacts investing in labor saving automation, structural changes, or service reductions. Other contacts emphasized changes in their hiring practices; one industrial contractor, unable to find qualified labor, reached out to a local school district about an apprenticeship program.
Wages have grown robustly since our previous report. On net, 65 percent of contacts reported increasing wages. Small firms continue to struggle to match ever-growing market wages. Wage increases at firms with worker shortages were compounded by increased overtime; one manufacturer estimated a 5 percent to 20 percent increase in labor costs from overtime and hazard pay.
Prices
Prices have increased moderately since our previous report. A greater share of contacts than usual reported that price increases have been higher than expected. The majority of contacts noted the ability to increase prices charged to consumers in the near future. Several retail contacts indicated they were behind on raising prices to consumers. One retail contact reported that a shortage of in-store staff to physically change price tags has been an impediment to raising prices and that they had to enlist corporate employees to change price tags. Retailers also reported plans to utilize electronic price tags to reduce the labor needed to change prices. A furniture retail contact reported that a several-month lag on deliveries will result in elevated retail prices this year. An auto sales contact expects prices to fall as inventories build up.
Consumer Spending
District general retailers, auto dealers, and hospitality contacts reported mixed business activity since our previous report and a mixed outlook for the immediate future. District retailers have noted that their sales are high in part because of a steady demand for higher-priced items. An Arkansas retailer noted that their sales are still being influenced by supply chain issues, as they recently received a shipment that was due in April 2021. An auto dealer in Louisville reported their manufacturer was unable to supply anticipated new vehicle stock and as a result their used vehicle trade-ins suffered. Restaurants in downtown Memphis are still dealing with the effects of the pandemic as of late January since convention business and travel have yet to recover.
Manufacturing
Manufacturing activity has slightly increased since our previous report. Survey-based indices suggest that production, capacity utilization, and new orders have all slightly increased. Firms in Arkansas and Missouri reported slight reductions in production and slight upticks in new orders. The Omicron COVID-19 variant applied pressure to manufacturing labor, both in terms of worker hiring and absenteeism. The easing of travel restrictions has increased the availability of raw materials from Europe, relieving some supply chain issues. Firms continue to invest in process automation to address the systemic workforce shortage, with one manufacturing company in Arkansas tripling their number of robotic welders. On average, firms reported they expect slight increases in production, capacity utilization, and new orders in the third quarter, and they remain optimistic about the level of production.
Nonfinancial Services
Activity in the nonfinancial services sector has decreased since our previous report. Airport passenger traffic decreased slightly month-over-month, though it remains well above levels at this point last year. Several contacts attributed below-expected sales at this point in the quarter to the Omicron COVID-19 variant. A healthcare contact reported that the combination of COVID-19 and winter weather led to a decline in patient volumes of over 30%. Despite this, hospitals continue to deal with significant labor shortages. A transportation contact mentioned that a lack of qualified labor—specifically, truck drivers—has hindered business. A technology contact reported that rising interest rates are leading to purchasing hesitancy among customers.
Real Estate and Construction
The residential real estate market has remained strong since our previous report. Home prices remain high relative to incomes and one contact believes many first-time buyers will be priced out this year. Inventory has remained extremely low, and contacts expect it to remain low through at least the next quarter. Apartment rental rates also remained high relative to incomes. One contact stated that the high demand for rentals has increased the rate per square foot substantially. The commercial real estate market has also remained strong, with very high demand for industrial real estate in particular. Demand for retail space has increased since our previous report. One contact believes institutional capital is currently shifting more toward retail spaces, due to continued high demand and diminishing returns in the industrial and residential sectors. Many contacts remain concerned about the uncertainty surrounding potential interest rate increases.
Demand in the construction market remains strong despite supply chain disruptions. Residential construction demand is slightly higher than in our previous report. Input costs, delivery times, project backlogs, and project completion times have all increased in the past month. Contacts reported that the most important factor impeding business growth during the next few months is the labor shortage.
Banking and Finance
Banking conditions have improved slightly since our previous report. District banks reported an increase in loan demand since the previous survey period. Commercial, industrial, and auto loans increased moderately, while demand for credit card lending decreased. Liquidity remained elevated due to pandemic-related government assistance, but bankers reported difficulties in finding investments to deploy excess funds. Overall delinquency rates decreased modestly, and a contact reported asset quality metrics to be historically strong.
Agriculture and Natural Resources
District agriculture conditions have improved modestly since our previous report. The number of acres of winter wheat planted in the District this season have increased 10% over the same period last year. This increase primarily came from Illinois, Kentucky, and Missouri, which saw their acreage rise an average of 20%. While contacts remain optimistic about 2022, there is continued concern about the increased costs of inputs such as fertilizer, pesticides, and machinery. Of particular concern is corn production, which uses significantly more fertilizer than other crops.
Natural resource extraction conditions increased modestly from November to December, with seasonally adjusted coal production rising 10.6 percent. December production decreased slightly, by 3.1 percent compared with the previous year.