Beige Book Report: St Louis
September 7, 2022
Summary of Economic Activity
Economic conditions have declined slightly since our previous report. Consumer demand for goods and services has slowed slightly and price increases have continued across a broad range of sectors. Labor shortages have limited activity in service sectors, and employers continue to raise wages to attract and retain workers. Input prices rose, and most firms reported plans to pass additional increases on to consumers. Real estate contacts saw homebuying activity slow significantly, while demand for rental properties strengthened. The agriculture and manufacturing sectors experienced continued supply chain bottlenecks and input shortages that contributed to price increases. The overall outlook for business conditions over the next 12 months has improved slightly but remains pessimistic.
Labor Markets
Employment activity has been mixed since our previous report. Contacts across the District continue to report that workers remained scarce. Several St. Louis public schools temporarily suspended school bus services because of a shortage of drivers. Some firms utilized flexible hours, bonuses, and increased entry-level pay to fill jobs and retain workers. In contrast, some Arkansas contacts reported recent signs of the labor market easing, including wage pressures beginning to level out.
Wages across the District have grown moderately since our previous report. One Louisville-area professional services firm gave workers bonuses to keep up with inflation, and a Little Rock leisure and recreation contact had to raise their skilled labor wages by 15 percent. Some short-staffed firms reported they were continuing to offer incentives to work more hours or on weekends but were still receiving few to no takers.
Prices
Prices have increased moderately since our previous report. Approximately half of all contacts reported modest to moderate increases in prices charged to consumers. A jewelry retailer reported higher prices charged to consumers and expects to further raise prices in coming months. Auto dealers reported increased prices charged to consumers. A contact in the health care industry reported "double digit" increases in payroll costs. Multiple contacts in the hospitality industry reported higher input costs, but reports on the pass-through rate to consumers were mixed. A furniture store contact expects sales prices to decrease due to excess supplier inventory.
Consumer Spending
District general retailers, auto dealers, and hospitality contacts reported mixed business activity and a mixed outlook. One retailer in St. Louis noted that they had a dramatic improvement in sales in early August; although they are not completely sure of the reason, they suspect that declining fuel prices played a big role. An auto dealer in Little Rock reported that some of their customers are asking to be let out of their vehicle order commitments. Most restaurants in Louisville noted that overall customer volume is down considerably. Hospitality contacts reported mixed business activity compared with this time last year and a mixed outlook for the upcoming months.
Manufacturing
Overall manufacturing activity increased slightly since our previous report. Survey-based indices suggest that production, capacity utilization, and new orders have all increased slightly, while inventory levels and employment remain low. Production times are still longer than they were pre-pandemic, and supply chain issues still limit the availability of key inputs. Though the backlog of orders remains long, the rate of new orders has slowed due to softening demand. Labor shortages from COVID-related absenteeism are still a major concern for manufacturers. On average, firms reported they expect slight increases in production, capacity utilization, and new orders in the coming quarter.
Nonfinancial Services
Activity in the nonfinancial services sector has decreased slightly since our previous report. While freight air traffic has slightly increased, passenger traffic decreased. A ground transportation company in Kentucky reported struggling to meet demand and to find new trucks and mechanics. Healthcare firms in the Louisville region saw tight labor markets and high employee turnover rates. Labor costs increased as outpatient medical clinics competed with hospitals for the same credentialed employees by increasing pay by 25 percent and paying licensing fees, but an increase in appointment cancellations and higher out-of-pocket expenses for patients led to fewer sales this quarter. In Eastern Missouri and Northern Kentucky, post-secondary education institutions saw lower enrollment as fewer people opted to attend college, and childcare contacts reported that a lack of qualified applicants inhibited expansion.
Real Estate and Construction
Commercial real estate activity has slowed slightly since our previous report, with large office buildings competing for few clients. Industrial real estate inventory remains extremely low, though industrial construction activity has increased.
Residential real estate demand has slowed significantly since our previous report. Contacts reported that it remains a seller's market, but the "multiple-offer" market has ended. Prices remain elevated compared with one year ago, and inventories are just beginning to return to pre-pandemic levels. An Arkansas real estate contact noted that, while demand has contracted, it remains above pre-pandemic levels.
Demand for rental units has continued to increase since our previous report—especially for single-family housing. Rental rates in all four major District MSAs increased since our previous report. The general outlook of contacts remains negative, with over 80 percent of contacts in real estate and construction describing their outlook as somewhat or significantly worse than the previous quarter.
Banking and Finance
Banking conditions in the District have seen little change since our previous report. On average, surveyed bankers indicated that overall loan demand has decreased slightly compared with the same quarter of last year. While mortgage loan demand has declined, due to a combination of rising interest rates and low housing inventory, demand for commercial and industrial loans has increased moderately. Delinquency rates for all loans are largely unchanged relative to the same quarter of last year, and watch-list loans remain manageable. Banking contacts in Louisville expect more competitive deposit rates in the coming months, as liquidity wanes from its previously high levels.
Agriculture and Natural Resources
District agriculture conditions have moderately worsened since our previous report. Compared with the previous reporting period, crop conditions in the District have either slightly declined or remained relatively unchanged. Relative to the previous year, the percentage of corn, cotton, and soybeans rated fair or better sharply declined, while the same measure for rice slightly increased. Worsened conditions may be partially attributable to the droughts and severe flooding that have affected the District, especially Missouri and Kentucky. Additionally, District contacts indicated that farming conditions remained strained due to input prices and labor shortages, with the ability to hire quality labor being their biggest concern.
Natural resource production fell moderately from July to August, with seasonally adjusted coal production decreasing just above 7 percent. Additionally, production is down approximately 3 percent from a year ago.