Beige Book Report: St Louis
June 1, 2022
Summary of Economic Activity
Economic conditions have improved at a modest pace since our previous report. The outlook for the remainder of the year weakened due to concerns about continued price increases and softening demand. Competition for workers continued to place upward pressure on wages. Prices for raw materials and fuel increased at a robust pace; firms passed on prices to consumers and adjusted behavior to try to mitigate the impact of price volatility. Consumer spending shifted from goods to services and became more sensitive to prices; retailers reported that credit card usage rose. Manufacturing firms reported that a backlog of orders should sustain production even as the rate of new orders declines due to higher prices. Residential real estate demand has cooled slightly due to rising mortgage rates, but inventory remains low due to supply constraints that have limited construction projects. Banking contacts reported that consumer lending demand has softened.
Labor Markets
Employment has increased modestly since our previous report. Labor shortages remain widespread, with firms noting difficulty hiring and retaining workers. Contacts in industries with predominantly in-person roles noted particular difficulty hiring. Some contacts remarked that remote work was allowing coastal firms to hire workers in the District for higher wages than local employers were willing to pay, causing an in-place "brain drain." Firms expanded benefits, increased outreach, turned to automation, and considered offshoring to handle the scarcity; one healthcare contact reported that he had to start his hiring process two to three months earlier than usual to find sufficient workers.
Wages have continued to grow strongly. One transportation contact reported that wages had increased for both low-skilled, hourly workers and skilled employees by 20% or more in the past six months. Some healthcare contacts reported that raising wages was more difficult due to the industry's contract and payment structure, but nevertheless reported that labor costs had increased substantially in the past year.
Prices
Prices have increased robustly since our previous report. Contacts in the construction industry reported high price volatility for plumbing materials, roofing materials, and asphalt. One such contact reported that prices for those items are, in some cases, increasing every 10 days. Contacts reported a decline in lumber prices. Contacts are hopeful the price of steel will decline in the near future. Contacts in the manufacturing industry have started announcing price increases to customers several months in advance. A Missouri manufacturer noted that industry attitudes toward price increases have shifted, with sales staff and customers "numb" to continued increases.
Consumer Spending
General retailers, auto dealers, and hospitality contacts reported slightly higher business activity and a mixed outlook. April real sales tax collections decreased in Missouri and Arkansas relative to March and increased in Kentucky and west Tennessee. St. Louis retailers noted that business activity has been consistent over the past month, but reported a negative outlook for the upcoming months, citing inflation and stronger demand for travel. One luxury car dealership in Northern Mississippi said that they are starting to sell fewer large cars and more small, fuel-efficient cars as demand shifts due to rising gas prices. Restaurants in Louisville saw a return to normal business activity during the Kentucky Derby, which was greatly affected by the pandemic in previous years. Hospitality contacts noted higher business activity compared with last month and last year, citing pent-up demand for travel. They also had a mixed outlook for the upcoming months, citing higher prices.
Manufacturing
Manufacturing activity has increased moderately since our previous report. Survey-based indices suggest that production, capacity utilization, and new orders have all moderately increased, and firms expect slight increases in the coming quarter. The primary concerns within the manufacturing industry continue to be the availability of labor and inputs. Firms continue to explore automated processes, though substantial lead times on robotics mean they are not a short-term solution. There is cautious optimism about future sales due to high order backlogs from pent-up demand and high inventory from the limited availability of key inputs.
Nonfinancial Services
Activity in the nonfinancial services sector has increased since our previous report. Airport traffic increased in April, with seaport bottlenecks increasing demand for air freight in Missouri. While business travel is rebounding, rising ticket prices are expected to cause slower growth in leisure travel across Northwest Arkansas and Tennessee. Transportation has seen a push toward automation, but contacts report struggling to train workers to maintain and repair the required technology. The nurse shortage has increased wages across the District, but nursing school enrollments are still down in Eastern Missouri.
Real Estate and Construction
The industrial and warehouse market has remained strong since our previous report. Rents have increased faster than input costs due to high demand. Multiple contacts reported optimism that input costs would come down after Amazon announced slowing their expansion of distribution centers.
The residential real estate market has seen demand begin to cool now that mortgage rates are increasing. However, with inventory still low, it remains a seller's market. One contact reported that many prospective homeowners are favoring new builds despite elevated input costs, because they can buy the house at asking price without competing against other buyers. According to multiple contacts in Louisville, first-time home buyers are dipping into their 401(k)s or drawing from their parents' retirement savings to enable cash offers.
Construction activity remains strong despite continued supply chain issues and increased input costs. Contacts reported that banks are hesitant to agree on rates for any projects not beginning immediately, given the uncertain outlook. One contact complained that paint is the only input available at a normal price.
Banking and Finance
Banking conditions have weakened slightly since our previous report. Although commercial lending has remained relatively strong, consumer lending has softened. Borrowing rates and secondary-market rates have begun increasing. Several large retailers reported that credit card usage increased. Mortgage and other lending rates increased significantly. Liquidity and deposits remain very high within the banking system, causing little pressure on banks to increase deposit interest rates. The combination of rising lending rates and stagnant deposit rates has allowed many banks to increase margins slightly from what have been persistent all-time lows.
Agriculture and Natural Resources
Agriculture conditions have improved slightly since our previous report. Contacts reported thin margins despite increased commodity prices due to rising input and labor costs, but remain optimistic due to persistent high demand. Contacts noted that rising energy prices have created an unprecedented opportunity for alternative energy products and other new technologies in the sector. The percentage of row crops planted has increased since the previous reporting period, but is down from this time in 2021. Progress of acres planted is down this year for every crop and all states in the District, which reflects production issues due to staffing and supply chain concerns.