Beige Book Report: St Louis
April 19, 2023
Summary of Economic Activity
Economic conditions have remained unchanged since our previous report. Although labor markets remain tight, contacts reported further improvement in their ability to hire and retain workers. Firms struggled to pass on higher costs to customers, which resulted in wage growth compressing profit margins. Consumer spending was mixed, with reports of weaker demand among low-income consumers but more robust demand among high-income consumers. Construction and manufacturing contacts reported that supply chains continued to improve. The real estate sector saw home sales increase and inventory continue to decline, though rental rates remained flat. The banking sector saw loan growth slow and deposits fall, but expressed confidence in their overall position.
Labor Markets
Employment has increased slightly since our previous report. Although labor markets remain tight overall, reports of easing have increased since our previous report. While unemployment rates remain low and hiring workers is still a challenge, more contacts have been reporting an ability to hire and retain workers to meet demand than in recent months. A railroad contact in Louisville reported reaching full capacity in employment for the first time post-pandemic. A St. Louis staffing company, although still reporting hiring challenges and churn in the market, has seen these issues begin to relax compared with last year. A Memphis contact reported labor shortages and retention problems are no longer widespread and are primarily affecting the service industry.
Wages have continued to grow slightly since our previous report. Companies reported slow wage growth due to difficulties transferring labor costs onto consumers and slightly improved labor supply. An insurance contact in Louisville reported rising wages cutting into their profit margins, and a home building contact in Little Rock reported margins being down 15-20 percent due to increased wages for employees.
Prices
Prices have increased modestly since our previous report. Overall, contacts project increasing prices, but at a slower pace compared with the previous few quarters. Despite increasing input costs, business contacts reported a decreased ability to pass on costs to consumers due to increased price sensitivity of consumers and the desire to maintain competitive pricing. Of businesses that reported the ability to increase prices, the projected change in prices varied. A contact in the car industry indicated only slight increases in prices, while a contact in the hospitality industry estimated a larger 6-10 percent increase in prices.
Consumer Spending
District general retailers, auto dealers, and hospitality contacts reported mixed business activity and a mixed outlook. In Little Rock, some stores saw less and more-volatile foot traffic, whereas others reported that higher-income consumers are starting to spend more again. A St. Louis auto dealer reported that business activity did not change over the past month, and they have a positive outlook for spring and summer. This dealer also noted that sales of luxury cars have not decreased, since the people who buy luxury cars are typically cash buyers and they are less affected by interest rates. A restaurant contact in Memphis reported that business has been stable, and they are careful about increasing prices to avoid driving away customer demand. The hospitality industry in Louisville is pessimistic about the tourism industry's chances of returning activity to pre-pandemic levels.
Manufacturing
Manufacturing activity has slightly decreased since our previous report. Firms in Missouri have reported a slight uptick in new orders, while firms in Arkansas have reported a slight decrease in new orders and a small rise in production. Raw material prices continue to decrease, with products from Asia returning to pre-pandemic levels. Supply chains continue to improve but remain suboptimal relative to before the pandemic. The manufacturing industry continues to expand in the region: Two companies in Lee County, Mississippi, added over 60 employees, which represents $2 million in each of their payrolls.
Nonfinancial Services
Activity in the nonfinancial services sector has remained stable since our previous report. While air passenger traffic has increased, freight traffic has slightly decreased. In Northwest Mississippi, access to rural healthcare continues to be affected by rising costs and low Medicare reimbursements, which have caused hospitals to delay investment in new structures and services. Investment in technical training increased across the District. A community college in Tennessee has partnered with local businesses to provide customized work-centered training and short-term credentials to address student concerns about the rising cost of education and local business concerns about the lack of qualified workers. Similarly, community colleges in the St. Louis area are investing in advanced manufacturing training programs by procuring high-end equipment, building new facilities, and developing new curriculums to accommodate more students. Memphis-area nonprofits reported that volunteer engagement has increased since our previous report.
Real Estate and Construction
Home sales in all four major District MSAs have increased since our previous report. The median sale price of listings in Memphis has increased significantly, and other major District MSAs have seen small increases in median sale price. Inventory has dropped in all four major District MSAs since our previous report. However, rental rates remain unchanged.
Commercial real estate continues to see low demand for large office spaces. In Northwest Arkansas, one contact reported high demand for commercial warehouses, which has resulted in a vacancy rate of less than 1 percent. Construction demand remains steady despite high interest rates. Contacts reported opportunities to bid on jobs if they have available capital. One St. Louis construction contact reported increased delays in project start times since our previous report. An Arkansas contact reported that, due to labor shortages, construction firms are winning bids and finding smaller subcontractors to bid on the jobs they have been awarded.
Banking and Finance
Banking conditions in the District have remained stable since our previous report. Loan growth in the commercial, industrial, and consumer lending sectors all declined slightly—a continuation of the cooldown in loan demand since the beginning of 2023. Real estate loan growth, on the other hand, saw an uptick. Total deposits fell. Contacts expect net interest margins to begin contracting if they have not already, as deposit costs are still increasing. Asset quality remains good, and bankers in the District are closely monitoring debt that will be renewed at higher interest rates this year. Memphis banking contacts reported a renewed focus in the industry on liquidity in light of recent bank failures, while expressing confidence in their diverse and strong deposit base. One Memphis-area contact reported inflows from local residents who had previously held deposits in distressed West Coast banks.
Agriculture and Natural Resources
District agriculture conditions have seen little change since our previous report. The number of acres planted in the District for corn, cotton, rice, and soybeans increased around 1 percent compared with last year; outcomes were similar for all District states. The composition of the crops has changed; cotton and soybeans were planted in lesser quantities compared with last year, while corn and rice increased in acreage. Southern parts of the District have planted significantly fewer acres of cotton and replaced it with corn and rice.
Natural resource extraction conditions declined moderately from February to March, with seasonally adjusted coal production decreasing 9 percent. March production was also down moderately compared with a year ago, falling over 5 percent.