January 18, 2017
Summary of Economic Activity
Information from contacts suggests that economic conditions have continued to expand at a modest pace since our previous report. Reports of planned activity in the manufacturing and nonfinancial services sectors were generally positive. Labor market conditions remain tight, with moderate growth in both employment and wages. Reports indicate that consumer spending growth was generally unchanged, but with expectations of improvement in the first part of this year. Residential real estate conditions were somewhat mixed, while commercial real estate activity remained robust. District bankers reported that loan demand remained modest, with growth among most loan types.
Employment and Wages
Anecdotal evidence suggests moderate increases in employment and wages since our previous report. Contacts described the year-end increases in employment as in line with growth in previous years. Reports indicated that manufacturing employment increased moderately in Missouri and modestly in Arkansas. Contacts in Louisville expressed difficulties finding seasonal workers because of the high demand for seasonal employment combined with a tight labor market, leading some to increase wages temporarily to attract employees. Contacts in Little Rock reported that wages for skilled workers continue to steadily increase. In addition, the number of unemployed workers per advertised vacancy fell modestly throughout the District in December.
Prices
Price pressures in the District remained modest. In general, business contacts did not report many changes in prices charged to customers. Low commodity prices continue to put pressure on profit margins in sectors dependent on the agricultural sector. For example, agricultural equipment dealers outside of Memphis reported they have reduced prices on late-model used trade-ins to fuel sales. A contact in Arkansas reported there has been no shale drilling activity recently due to large inventories and the low price of oil. Another contact in Little Rock cited concerns that the strengthening of the U.S. dollar is putting downward pressure on grain prices. However, since the previous report, cash prices for coal and feed corn both increased moderately, those for corn meal, soybeans, and sorghum increased slightly, those for rice declined slightly. Across the District, home prices continued to increase moderately. A contact in the Memphis area also reported higher prices in industrial and retail properties.
Consumer Spending
Reports from general retailers and auto dealers indicate consumer spending growth in the District was generally unchanged. Contacts described the increase in year-end sales as in line with typical seasonal fluctuations. Arkansas taxable sales picked up in December after a sluggish November. The purchasing sentiment of District households continued to indicate that the next few months should be a good time to buy major household items. Multiple business contacts cited relatively low gas prices compared with the national average as a source of optimism. Furthermore, nearly half of surveyed auto dealers expect year-over-year increases in sales in the first quarter of 2017, and the majority anticipates increases in inventory over the same period.
Manufacturing
Manufacturing activity has increased modestly since our previous report. Many companies reported capital expenditure and facility expansion plans in the District, including several manufacturers of food products and wood products. In contrast, a large manufacturer of transportation equipment announced plans to close a large facility and relocate operations outside of the District. Manufacturers were generally optimistic and expect new orders and production to increase over the first quarter. Contacts expressed concern about the strong dollar, the possibility of trade restrictions, and global economic weakness.
Nonfinancial Services
Reports of plans in the District's service sectors have been positive since the previous report. In particular, several firms that provide healthcare, retail, and utilities services announced plans to build or expand facilities and hire new employees. Reports from information services, leisure and hospitality, and professional and business services were mixed, with some expansion but also several facility closings and layoffs. Reports from the transportation sector were positive. A Little Rock contact noted that trucking activity has outperformed seasonality in the past 5 or 6 weeks.
Real Estate and Construction
Residential real estate activity was mixed across the District, with little overall change in home sales from the previous reporting period, while inventory remained tight. Residential construction activity was also roughly unchanged since the previous report. Seasonally adjusted building permits for November were flat, on average, across District metropolitan areas. Still, permit activity was higher than a year ago. Some local homebuilders indicated concerns over rising mortgage rates.
Commercial real estate activity increased at a moderate pace. Multifamily and industrial demand continued to strengthen. Commercial construction activity improved moderately. The amount of new non-residential space started in November was significantly lower than a year ago in the largest metro areas in the District. However, a number of new projects were announced or approved across the District. St. Louis in particular saw plans established or greenlighted for a multitude of new multifamily and office buildings. A local contact also noted that field work has been steadily increasing despite the slowdown in construction starts.
Banking and Finance
Credit market conditions within the District improved at a moderate pace since the previous reporting period. According to a survey of 85 small- and mid-sized District banks, overall lending activity experienced moderate growth across all lending categories with some signs of a slight tapering. Increases in real estate lending made the largest contributions to aggregate loan growth since the previous reporting period. Over the same time frame, loans to individuals expanded at the highest rate for any singular loan category. Bankers reported demand for commercial real estate loans was generally unchanged while commercial and industrial loan portfolios grew at a moderate pace. Some banks have reported increases in non-performing loans in their agricultural loan portfolios, which they attribute to low commodity prices throughout last year.
Agriculture and Natural Resources
As of late November, 95 percent of the District's planned winter wheat had been planted, which is a roughly 1-percentage-point improvement over last year. Faster planting occurred partly because District farmers planned to plant 13 percent fewer acres than they did for the prior crop year. Reports suggest that low snow accumulation, which serves as insulation for winter wheat, and periods of extremely cold temperatures may reduce yields.
District seasonally adjusted coal production dropped 3 percent from November to December, while year-to-date production through December was 18 percent below last year's level.