April 20, 2022
Summary of Economic Activity
Economic conditions have improved at a moderate pace since our previous report. The pace of hiring rose modestly, and wage growth remained strong. Prices, particularly for raw materials and food, increased at a robust pace. Reports on consumer spending were mixed, with notable signs of improvement in the tourism sector and softening growth in retail sales. Reports from manufacturers remain positive, with continued strong growth in new orders despite labor shortages and supply-chain disruptions restraining production. Real estate contacts reported a surge in seasonal buying activity coincided with a rise in mortgage rates, creating an uncertain outlook. Banking contacts reported a slight increase in loan demand and expect competition among lenders to put downward pressure on rates.
Labor Markets
Employment has risen modestly since our previous report. Although some contacts reported early signs of improvement, labor shortages all along the supply chain continued to hinder firms' expansion and output. One Indiana contact reported that an air pilot shortage was causing economic difficulties for their whole region. Companies, nonprofits, and local governments alike tried to connect employers to potential employees with career fairs and other programs.
Worker preference for telecommuting was so strong—and so at odds with employer preferences—that one local Chamber of Commerce offered separate employee and employer seminars on the topic to ease the tension. One major corporation incentivized workers' return to the office with a new coffee shop, decorative improvements, more collaborative spaces, and an arcade-style area.
Wages have grown strongly. The tight labor market continues to drive up wages and related benefits across industries and skill levels. Workers increasingly cited inflation when demanding higher wages. One food service employee cited their relatively low pay as a primary driver in recent unionization efforts.
Prices
Prices have increased robustly since our previous report. Lumber prices are once again at record highs after declining in the second half of last year. Contacts reported a surge in steel prices since our previous report. Some construction suppliers have several planned price increases for the near future; increases range from 6% for roofing materials to 75% for glass fiber felt sheets. Some suppliers and trucking companies are adding fuel surchargers or delivery fees to orders, which most contacts are passing on to consumers. Agriculture contacts noted higher fuel and fertilizer costs, which will be passed on to consumers. A contact in the restaurant industry reported that chicken and butter prices have increased since the beginning of the year.
Consumer Spending
General retailers, auto dealers, and hospitality contacts reported mixed business activity and a mixed outlook. West Tennessee consumer sentiment about current and future conditions has worsened since December. Memphis general retailers experienced a slow first quarter, citing ongoing supply chain and product availability issues, and have a mixed outlook for the upcoming months. A St. Louis auto dealer reported that business activity was up in March compared with February; however, they noted that new vehicles are slow to leave factories due to shortages in parts previously sourced from companies that went out of business during the pandemic. One restaurant in Louisville reported that, despite rising prices and energy costs, they believe their business activity won't be greatly impacted because of a shift to more profitable takeout orders. Tourism has started to rebound throughout the District with hotel bookings showing notable improvements, although contacts noted that risks to further recovery include rising gas prices and future COVID surges.
Manufacturing
Manufacturing activity has strongly increased since our previous report. Firms in both Arkansas and Missouri reported moderate to strong upticks in new orders and production. Demand has continued to remain strong despite significant price increases, exceeding production capacity and creating order backlogs. Some firms are concerned demand may soon soften due to these continued price increases. Labor inputs and wages also remain high due to worker shortages. One contact in trailer manufacturing noted that they "could double their sales if they had the workers." Firms continue to invest in process automation to reduce their reliance on human labor.
Nonfinancial Services
Activity in the nonfinancial services sector has increased since our previous report. Airport passenger traffic increased in March, nearing 90% of pre-pandemic levels. Transportation sector contacts have implemented fuel surcharges to partially offset the rapid rise in fuel prices and continue to face a shortage of drivers; some are testing autonomous vehicles as a long-term solution. An Arkansas transportation contact reported revenues exceeding pre-pandemic levels due to increased demand, although a shortage of parts for needed repairs has been an issue. Hospitals continue to face shortages of nurses and lab supplies, although declining COVID-19 cases have improved morale. A community college in Southwest Tennessee is experiencing an uptick in overall applications after three semesters of dropping enrollment.
Real Estate and Construction
The residential real estate market has remained strong since our previous report. Apartment rental rates have continued to increase strongly. Multiple contacts reported high competition, with rental properties getting as many as 50 contacts in the first day after posting. Despite climbing interest rates since our previous report, home buyers have remained undeterred. Demand has held strong; inventory has fallen and remains around 25-30% lower than this time last year in the District's major MSAs. One contact believes that higher interest rates should help soften demand throughout the year but real estate will continue to be a seller's market in the short-term because of low inventory.
Reports on commercial construction have been mixed. One contact previously believed that demand would have tapered off by now, but despite increases in input costs and supply chain problems demand continues to be strong. However, a Memphis area banker reported two instances where customers delayed or cancelled developments because of high input prices. A contact in Arkansas mentioned that the shortage of skilled labor coupled with shipping delays is hampering project completion. One example is the lead time for electrical switchgear, which has risen from 20 weeks pre-pandemic to 60 weeks.
Banking and Finance
Banking conditions have improved slightly since our previous report as banks reported an increase in overall lending activity. Commercial and industrial loans increased slightly, while consumer and real estate loans increased moderately. Deposit levels remained elevated, but deposit growth slowed. A Memphis banking contact reported an influx of customers asking to fix their adjustable-rate loans or extend their fixed-rate loans in light of the recent interest rate increase and uncertainty around future rates. At least one large lender continues to lend at low rates for long terms. Overall, banking contacts expect high liquidity throughout the system to keep downward pressure on interest rates.
Agriculture and Natural Resources
Agriculture conditions have improved slightly since our previous report. The number of acres planted across the District for corn, cotton, rice, and soybeans was little changed from last year. Tennessee saw the most growth of all District states, with a moderate increase of 10% in acres planted. Corn and rice were planted in lesser quantities compared with last year, while cotton and soybeans increased in acreage. Contacts have expressed concern about a continued rise in input costs and availability of inputs, particularly fertilizer.
Natural resource extraction conditions saw little change from February to March, with seasonally adjusted coal production decreasing by 0.5%. March production went down moderately compared with a year ago, decreasing over 8%.