Beige Book Report: St Louis
December 5, 2018
Summary of Economic Activity
Economic conditions have slightly improved since our previous report. Firms indicated modest growth in employment and wages. Wage increases were widespread and higher than previous years for the vast majority of firms. Similarly, price pressures have increased modestly since our previous report. Consumer spending activity improved slightly, although auto sales showed little to no growth. Reports from manufacturing firms were upbeat; many firms reported strong orders and a positive outlook. Conversely, reports from bankers and real estate contacts were generally pessimistic, with these contacts reporting slight declines in activity. Overall, the outlook among all contacts continued to weaken but remains slightly optimistic for the upcoming year. On net, a slightly greater share of contacts expect economic conditions in 2019 to be better or somewhat better than 2018.
Employment and Wages
Employment has grown modestly since the previous reporting period. On net, 22 percent of business contacts surveyed reported that employment was higher or slightly higher than a year ago. Approximately half of the contacts expected their firm to increase employment over the next year, and the remaining contacts expected employment to remain unchanged. Contacts ranked an inability to find candidates with the required skills as the single greatest factor restraining hiring. The labor market was especially tight in the manufacturing, construction, and transportation sectors. One contact reported that manufacturing firms were turning down new orders due to worker shortages. Firms, particularly small businesses, continue to use nonwage benefits to attract employees. Staffing contacts in St. Louis reported that employees seem to have more leverage than employers for the first time in several years.
Wages have moderately increased since the previous report. On net, 39 percent of survey respondents indicated that wages were higher or slightly higher than a year ago, and 30 percent reported increases in labor costs. Contacts reported that the tight labor market led to increased pay for both new hires and existing employees: 77 percent of firms reported raising wages and salaries by more than they did in the past few years. Additionally, raises for new hires at national retailers have pushed up starting wages. Small business wages increased modestly in the St. Louis area and moderately in Tennessee.
Prices have increased modestly since the previous report. On net, 27 percent of business contacts reported that prices charged to consumers increased relative to last year. Nonlabor costs for businesses also rose modestly. On net, 33 percent of survey respondents held that costs were higher than the same time last year, which is unchanged from our survey three months ago. Metal prices, while remaining high in year-over-year terms, showed little change since the previous report. Agricultural prices remain generally low, and decreased international demand has increased the cost of using grain storage facilities as farmers seek to store, rather than to sell, their crops.
Reports from general retailers, auto dealers, and hoteliers indicate that consumer spending has slightly increased since our previous report. Real sales tax collections increased in Arkansas, Missouri, Tennessee, and Kentucky relative to a year ago. Reports from St. Louis auto dealers indicated that auto sales slightly increased, while Little Rock and Memphis auto dealers indicated that auto sales were flat relative to a year ago. Auto dealers reported increased demand for new vehicles, but they also expressed concern over higher interest rates on new vehicle loans. Hospitality contacts in Missouri reported that sales were flat year over year. Arkansas tourism sales tax revenue slightly increased year over year.
Manufacturing activity has increased moderately since our previous report. A large majority of contacts reported that production, new orders, and capacity utilization increased. Several companies reported new capital expenditure and facility expansion plans, including firms that manufacture agricultural chemicals and window coverings.
Contacts are also optimistic about the next quarter, with net majorities expecting increases in production, new orders, and capacity utilization. However, one contact in the chemicals sector is reporting that layoffs will take place between this quarter and the first quarter of 2019, and a few manufacturing contacts expressed concern that labor market tightness is contributing to a shortage of qualified employees.
Activity in the nonfinancial services sector has improved slightly since the previous report. Across the District, sales expectations were met. Compared with a year ago, 68 percent of survey respondents noted higher sales and 52 percent expect the next quarter also to be higher year over year. Local contacts note that barge activity has increased due to the large number of storage barges for soybeans affected by recent tariffs. National logistics firms continue to hire temporary workers due to higher seasonal demand.
Real Estate and Construction
Residential real estate activity increased slightly. Seasonally adjusted home sales for October increased slightly overall. Contacts continued to report inventory shortages; and, on net, about one-quarter of contacts reported that sales halfway through the fourth quarter have fallen short of expectations.
Residential construction activity was mixed. October seasonally adjusted permit activity within District MSAs was modestly lower than one year ago. However, about 36 percent of survey respondents, on net, reported an increase in residential construction relative to the same time last year, and the same fraction of respondents reported that they expect this trend to continue into the first quarter of 2019.
Commercial real estate activity has decreased modestly since the previous report. Contacts reported a decrease in demand for most property types, particularly office and retail, and about 40 percent of respondents, on net, reported a decrease in multifamily demand in the current quarter. About 10 percent of respondents, on net, expect a slowdown in activity to continue into the first quarter of 2019; however, respondents expect demand for retail space to pick up in the first quarter of 2019.
Commercial construction activity has remained unchanged since our previous report. There was a slight decrease in multifamily permit activity in most of the District's major MSAs relative to the prior month, but local contacts in Little Rock reported that the market was strong and there was robust demand for construction. On net, one-third of contacts expressed an optimistic outlook going into the first quarter of 2019.
Banking and Finance
Banking conditions have weakened slightly since the previous report. Loan demand for commercial and industrial loans was unchanged relative to year-ago levels, while loan demand for mortgages slightly declined. Bankers expect stable demand growth overall into the first quarter of 2019. Credit standards overall tightened slightly relative to year-ago levels. Overall delinquencies remained relatively stable on a year-over-year basis, with only a slight increase for the final quarter of 2018. Commercial and industrial loan delinquencies are expected to remain unchanged in the first quarter of 2019.
Agriculture and Natural Resources
District agriculture conditions declined modestly from the previous reporting period. Corn, cotton, and soybean yields are expected to be higher than 2017 levels, while rice yields are expected to be lower. Contacts noted that unusually wet weather has impacted crop quality negatively this fall, which contributed to a deterioration in crop prices. In addition, contacts expressed concern over the ongoing tariffs leveled at U.S. agricultural products. There are reports of storage shortages as soybeans that are normally exported to China are being stored in large quantities rather than exported.
Natural resource extraction conditions declined slightly from September to October, with seasonally adjusted production declining a little over 3 percent. October production increased 3 percent from a year ago.
For more information about District economic conditions, visit: https://research.stlouisfed.org/regecon/