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Beige Book Report: St Louis

April 19, 2017

Summary of Economic Activity
Reports from contacts suggest that economic activity in the District has continued to increase at a modest pace since our previous report. Overall employment growth was modest, while wage growth remains moderate. Overall inflationary pressures remained modest. Reports on consumer spending suggest moderate growth since our previous report, with a moderate uptick in auto sales toward the end of the first quarter. Real estate activity was little changed, while District banks reported moderate growth in loan demand. Overall activity in agriculture and natural resources remains weak because of low commodity prices; however, conditions remain generally unchanged since the previous report.

Employment and Wages
Anecdotal evidence suggests modest employment growth since the previous report. Several industries continue to report shortages of available workers. Construction contacts in Memphis and Little Rock reported shortages of workers, and manufacturing contacts reported difficulties in hiring and retaining experienced employees. Contacts in transportation and manufacturing reported that growth has been restrained because of difficulties hiring experienced workers.

Contacts reported moderate wage growth since the previous report. A manufacturing contact in Louisville noted upward pressure on wages in the region, with employers expecting to moderately increase wages. Anecdotal evidence suggests that tightness in the labor market has resulted in some employers increasing wages to attract employees.

Price pressures in the District remained modest. Business contacts did not report changes in overall prices charged to customers. Low commodity prices continue to put pressure on sectors dependent on the agricultural sector. The most-expensive used farm equipment is selling at deep discounts at auctions, while equipment prices have remained stable or increased slightly for the less-expensive equipment. Contacts in Memphis and Little Rock reported feed prices have declined, given the lower price of corn. Since the previous report, prices for coal and rice have remained about the same, while prices for corn, soybeans, sorghum, and wheat have declined slightly.

Across the District, home prices continued to increase moderately, with contacts in all areas reporting low inventory. Contacts in Memphis and Louisville reported rents were modestly higher for Class A commercial properties, particularly in some major markets. Price pressures from construction materials were mixed. Contacts in Little Rock reported solid wood prices increased modestly, while prices for pine saw timber, chips, and pulpwood remained flat or decreased slightly since the mild winter allowed for an increase in supply.

Consumer Spending
Reports from general retailers, auto dealers, and hoteliers indicate consumer spending growth has been moderate since our previous report. Retail sales growth was particularly strong in the Memphis area; accordingly, the majority of households in west Tennessee continue to hold an optimistic outlook for their financial situation for 2017. Furthermore, the northwest Arkansas region reported record sales tax revenue figures for March. Hospitality contacts in St. Louis and Louisville reported a modest to moderate decline in occupancy rates. Reports from auto dealers indicate that sales picked up after a relatively slow January. Furthermore, multiple dealers in the Memphis area noted a shift in demand toward used vehicles.

Manufacturing activity has increased modestly since our previous report. Manufacturing activity in March was stronger than one month earlier in both Arkansas and Missouri, although the pace of increase slowed slightly in Missouri. Many companies reported capital expenditure and facility expansion plans in the District, including firms that manufacture medical devices, clothing, and chemical products. However, a number of firms announced plans to close facilities, including manufacturers of machinery, food products, and primary metals.

Nonfinancial Services
Reports of plans in the District's service sector have been mixed since the previous report. In particular, several firms that provide transportation, warehousing, and information services reported plans to build new facilities or expand employment. Two trucking contacts reported business is good enough to justify new equipment and increased hiring. Reports from the professional business services sector were mixed. Some existing employers laid off workers but new companies opening in the District were hiring and building facilities. Reports from the healthcare sector were mostly negative; layoffs were announced in Louisville and Memphis; however, healthcare facility expansions were announced in Little Rock.

Real Estate and Construction
Residential real estate activity has decreased slightly since our previous report. Home sales declined in most major metro areas. Local contacts continued to report a shortage of inventory relative to strong current demand. Concerns about rising mortgage rates were mixed, as some contacts indicated that higher rates have had no significant effect on the market.

Residential construction activity has improved modestly since the previous report. February construction starts were generally flat while permit activity increased moderately. Some local builders reported that speculative homes were selling before completion, indicating that construction has continued to lag behind demand.

Commercial real estate activity has been flat since the previous report. Local contacts indicated that demand has remained steady for most property types. Contacts noted some concerns that St. Louis office vacancy rates will rise in the near future due to new construction combined with expiring leases of vacant properties.

Commercial construction activity was mixed. Non-residential construction started to dip in February. However, recent reports from local contacts were generally positive, with most seeing either a continuation of strong construction activity or an increase in the number of projects undertaken. Contacts expect this trend to continue through the year. New projects for various property types were announced or broke ground, including several new hotels, multifamily structures, speculative industrial parks, and mixed-use projects.

Banking and Finance
Banking and credit conditions in the District have strengthened at a moderate rate since the previous report, with some signs of accelerating growth in lending. Real estate loan volumes increased at a moderate pace over the period with the rate of growth continuing to tick upward. However, contacts report that high volume lenders are shrinking market areas for multifamily properties due to softening demand. Meanwhile, commercial and industrial lending among District banks rose at a moderate to robust rate and markedly outpaced the nation in terms of growth. Loans to individuals and households continue to expand at a robust rate and continue to account for an increasingly larger share of outstanding loan portfolios.

Agriculture and Natural Resources
Agricultural conditions were unchanged from the previous report and the same time last year. In March, farmers planned to plant about 20 percent more cotton than last year, but 20 percent less rice. These movements correspond to a continued increase in cotton fiber prices and a continued decline in rice prices. With corn and soybean prices remaining low, farmers planned to reduce corn acreage by 5 percent and increase soybean acreage by roughly the same percentage. This planned switch in the District's two largest crops was largely driven by the fact that soybeans, with much lower per-acre costs, require much smaller operating loans.

Natural resource extraction conditions improved modestly from the previous report. District seasonally adjusted coal production grew 4 percent from January to February and was 10 percent higher than one year ago.