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July 2018

Eighth District Beige Book


Summary of Economic Activity

Economic conditions in the District have improved slightly since our previous report. Firms reported modest increases in employment despite continued difficulties finding workers. Wages continued to increase modestly. Price pressures have increased modestly as freight costs have increased across all sectors. Reports from consumer spending contacts remained mixed. Manufacturers reported increases in production and new orders. Residential real estate activity improved modestly while construction activity picked up slightly. District bankers reported increased lending activity as commercial and industrial loan growth continued to be robust. Agriculture and natural resources conditions have been relatively unchanged since the previous report.  

Employment and Wages

Employment has increased modestly since the previous report. Several manufacturing companies, including multiple steel producers, announced plans to expand and hire new employees. Furthermore, survey-based employment indexes indicated modest increases in June manufacturing employment across Missouri and Arkansas. To attract and retain employees, firms reported lowering hiring standards, offering more-generous non-wage benefits, and establishing training programs through partnerships with local schools and non-profit organizations. Contacts noted difficulties filling construction and trucking positions in particular. Wages have increased modestly since the previous report. Contacts reported that the continued tight labor market has led to increased wages in the services sector, particularly for entry-level positions. Retail and food-service firms reported having to raise wages of existing employees to match the higher rates for new employees. One trucking company offered the largest one-time pay increase in its history. Wages paid by small business in the St. Louis metro area grew slightly.    

Prices

Price pressures have increased modestly in general since the previous report. Local contacts reported robust increases in shipping costs across all sectors due to higher fuel prices and driver shortages. Tariffs and trade restrictions have had a mixed effect on prices. U.S.-imposed tariffs have raised the prices of steel and aluminum, increasing input costs for several business contacts. Those contacts in construction lamented that rising prices pressured the industry before this tariff-induced inflation of metal costs. In contrast, proposed tariffs by China have led to an overall downturn in agricultural commodity prices, particularly the price of soybeans. These lower agricultural commodity prices have been passed on to food retailers, who reported that lower food prices have more than offset increased freight costs

Consumer Spending

Reports from general retailers, auto dealers, and hoteliers indicate mixed consumer spending activity. Real sales tax collections modestly increased in Arkansas relative to a year ago, but declined slightly in Missouri, Kentucky, and West Tennessee. The consumer outlook in West Tennessee has improved since the first quarter, and households, on net, expect to increase spending in the next few months relative to a year ago. Retailers in Tennessee indicated that year-to-date sales have been above last year's levels and expect this trend to continue through the rest of the year. In response to the recent Supreme Court ruling, internet-based retailers indicated that they will likely "eat the cost" from collecting sales tax in the medium term. However, they expect to pass the cost to consumers in the long run through the prices they charge for shipping and by changing eligibility for free shipping. Reports from auto dealers were mixed: Memphis auto dealers reported an increase in sales year over year, while dealers in Louisville and Little Rock reported a decrease. Memphis and Little Rock auto dealers also indicated a shift in demand toward SUVs and crossovers. Hoteliers in Little Rock and Memphis reported strong and stable demand, and St. Louis hospitality contacts continued to express a positive outlook for the coming months.

Manufacturing

Manufacturing activity has increased at a moderate pace since our previous report. Overall manufacturing activity was stronger than one month earlier in both Arkansas and Missouri, and the pace of expansion increased in each. New orders and production also rose in both states. Several companies that manufacture motor vehicles and motor vehicle parts reported plans to expand facilities and increase production. Contacts in the paper packaging manufacturing industry reported running at nearly full capacity. Similarly, contacts in the recycled metal industry noted record volumes, and contacts in the mining equipment manufacturing industry reported experiencing backlogs. On the other hand, a manufacturer of plastic products for appliances indicated that sales were down. Several manufacturers noted increases in input prices, which they linked to tariffs. 

Nonfinancial Services

Activity in the services sector has improved slightly since the previous report. The number of posted vacancies for nonfinancial services occupations in May was generally unchanged in Louisville and Memphis relative to the prior month and increased moderately in St. Louis. Arkansas air passenger transit and river barge traffic volumes were somewhat lower compared with the previous year, while Louisville air passenger transit volume remained flat. Contacts noted that a continuing shortage of commercial truck drivers has led to higher demand for railroad shipping.

Real Estate and Construction

Residential real estate activity has improved modestly since the previous report. Seasonally adjusted home sales were slightly higher in April. Inventory levels remained low, and contacts continued to report a shortage of homes in the market with newly listed homes selling quickly.

Residential construction activity has improved slightly. Permit activity in May was flat relative to the prior month. A contact in Louisville reported seeing a robust level of new construction under way, and a contact in Little Rock noted that a healthy demand for single-family homes has led to new prospective developments. St. Louis builders expect 2018 permits to exceed the total from last year.

Commercial real estate activity has been unchanged since the previous report. Contacts in Little Rock reported that the market is generally healthy across most property types but were apprehensive over how future interest rate increases may impact profits and cash flows. Commercial construction activity was flat. Some contacts in Little Rock expressed concerns that new hotel construction under way risks oversaturating the market. A Louisville contact reported continued robust multifamily construction.  

Banking and Finance

Banking conditions in the District have improved at a moderate pace since the previous report. Outstanding loan volumes at small and mid-sized banks grew by 6 percent relative to year-ago levels in the second quarter, down from 7 percent in the first quarter and continuing the steady decline in the rate of loan growth since the end of 2016. Commercial and industrial lending remained strong, growing by 12 percent in year-over-year terms, double the national rate. In contrast, residential real estate lending grew slowly and lagged behind that of the nation for the second consecutive quarter. Bankers also continued to report sluggish deposit growth

Agriculture and Natural Resources

Agriculture conditions weakened slightly from the previous reporting period, but improved slightly from the same time last year. The percentages of corn, cotton, and rice rated fair or better in June declined slightly relative to the prior month, while that of soybeans increased modestly. However, both the corn and soybeans percentages were higher than a year ago, the cotton percentage was little changed, and the rice percentage was down slightly. Estimated soybean acreage saw a substantial upward adjustment in Illinois relative to March planting intentions but was revised downward in Missouri.

Natural resource extraction conditions were essentially unchanged from May to June, with seasonally adjusted coal production up 0.1 percent. However, June production was 6 percent below prior-year levels.




Highlights by Zone

The Beige Book report provides an overview of economic conditions in the Eighth District based on information received from business contacts. Because aggregating zone data to the District level sometimes masks variations in conditions within the District, the summaries below are by zone: The headquarters office is in St. Louis and the branch offices are in Little Rock, Louisville, and Memphis.

St. Louis Zone

Economic conditions in the St. Louis zone have continued to improve slightly since our previous report. Reports indicate continued improvement in labor markets. An area benefits provider noted employment among its small business clients increased from May to June, and hourly earnings increased at an annualized rate of 2.5 percent. Contacts at food service, warehousing, and retail firms noted increasing wages to attract new employees.

Reports from area manufacturing firms were mixed, but on net, were favorable. Manufacturing indexes for Missouri increased moderately. Retail spending weakened slightly, as Missouri real sales tax revenues declined by less than 1 percent compared with the same time last year. Reports on tourism activity were generally positive, with much of the strength attributed to reopening of the Arch national park grounds and generally favorable weather. Real estate conditions in the St. Louis metro area have shown modest improvement since our previous report. Seasonally adjusted single-family home sales increased by just over 1 percent in April and inventories were unchanged. Single-family building permits increased by 1.4 percent in May. 

Little Rock Zone

Overall economic conditions in the Little Rock zone have improved slightly since our previous report. A staffing agency in northwest Arkansas noted that most of their candidate requests are primarily due to new growth and expansion. At the same time, the firm is seeing higher turnover and workers being more sensitive to wages during the hiring process.

Reports on consumer spending indicate modest improvement since our previous report. Arkansas real sales and use tax revenues increased 2.5 percent in May compared with the same time last year, and tourism sales tax revenues increased 3.5 percent. An owner of multiple franchises of fast-food restaurants noted that second-quarter sales were very strong after a sluggish start to the year.

Reports from the transportation sector indicate considerable constraint. A contact reported that the supply of intermodal containers is very tight. Typical customers are demanding 12 to 15 containers per day and only receiving about 8 containers. Trucking firms continued to highlight a driver shortage as the main driver of higher prices, with one contact reporting 7 to 8 percent increases in prices during the past two months. Conversely, reports on barge activity have improved as water conditions have returned to normal levels.

Louisville Zone

Economic conditions in the Louisville zone have improved slightly since our previous report. Labor market conditions remain tight, with increased reports of employee turnover and increasing wage pressures.

Reports of consumer spending were mixed. Auto dealers reported weak but positive sales growth, and Kentucky real sales and use tax revenues declined about 0.5 percent. However, reports of tourism activity were strong, with visitor statistics at major attractions and national parks higher than one year ago.   

Memphis Zone

Economic conditions in the Memphis zone have continued to improve slowly since our previous report. Area bankers continue to report increased loan growth, with strong competition for new loans.

Reports on auto sales were generally positive, although one dealership stated that factory incentives have played a big role in recent sales of trucks and SUVs. Other retailers reported favorable year-to-date sales that were in line with expectations and higher than one year ago.

Manufacturers of automobile parts, furniture, farm equipment, and construction materials reported higher input prices and passing those increases along in the prices of their goods due to tariffs on steel and aluminum. 

Housing market conditions showed improvement. Seasonally adjusted homes sales in the Memphis metro area increased by 11 percent in April; at the same time, inventories increased by a little less than 1 percent. Construction activity was slightly weaker, as single-family building permits declined by 0.2 percent.







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