Eighth District Beige Book

Summary of Economic Activity

Economic activity across the Eighth District has slightly increased since our previous report. Prices increased moderately, with a greater pushback against those price increases. Consumer spending has slightly declined across the income distribution. Contacts expect slight employment growth, particularly coming from industrial production. Manufacturing activity has improved slightly; however, contacts expect an uptick in new orders and production in the next quarter. Residential and commercial real estate activity have been slower than expected due to high interest rates and lower demand. Banking activity has modestly improved, with contacts observing an increase in new loans and stable delinquencies. The agriculture sector continues to show some stress due to low commodity prices and lower-than-expected yields. The outlook has modestly improved; however, contacts noted that uncertainty about future policies was restraining investment, and businesses were increasing inventories in anticipation of potential import tariffs.

Labor Markets

Employment has remained unchanged since our previous report. Contacts reported a more stable workforce with less attrition and more retention occurring. While contacts continue to report easing in hiring, skilled labor positions continue to be challenging to fill. A Louisville construction contact noted needing to expand training with employees as there are fewer skilled workers available. Several manufacturing and construction firms expect employment growth in the next quarter.

Wages have increased at a moderate pace since our previous report. Contacts expect wages to continue increasing at a similar pace in upcoming months. Manufacturing, construction, and IT services companies indicated that increases to the minimum wage in Missouri were expected to have no major impact on their wage distribution, whereas the opposite was true for workers in rural areas working in childcare, restaurants, or retail.

Prices

Prices have increased moderately since our previous report. A manufacturing contact in St. Louis noted higher costs of inputs and raw materials. A St. Louis service provider noted that some projects have continued to run over budget due to cost increases. A distributing company in Tennessee reported that they were able to increase contract prices between 2 percent and 3 percent. However, the pushback against price increases has intensified lately and contacts noted flat or declining end-user prices. Auto dealers noted that prices had fallen compared with last quarter and expect prices to continue to fall over the coming quarter. A retail contact in Missouri reported that, although materials costs had increased, the firm cannot pass those added costs onto customers. A cooking appliances manufacturer noted that materials costs had declined and that they had not raised prices on their products. Contacts expect price growth to slightly increase next quarter, citing rising insurance costs and potential import tariffs.

Consumer Spending

Consumer spending has slightly declined since our previous report. Retail spending on small items continues to be slightly below expectations as consumers seem to be more cautions and less willing to spend discretionary funds. A St. Louis retailer noted that customers seemed to be purchasing less overall; despite the closure of several companies in their industry, they were not seeing an uptick in new customers. Contacts noted that consumer spending had declined across the income distribution. An oil change business noted that clients were not buying the expensive synthetic oil but instead opting for the base oil offered. A holiday decorator noted that their wealthy clients were opting to decorate without using their services and were not purchasing new décor, as they usually do. Automotive sales have been mixed. While auto dealers in Missouri noted that the market was softer and demand was lower, Arkansas dealers noted that customers seemed to have delayed their purchase decisions until after the election and that sales had broken loose since then. Contacts expect conditions to slightly improve over the next year.

Manufacturing

Manufacturing activity has improved slightly since our previous report. Many firms reported that sales had slightly increased and had met expectations. Employment and hours per worker have remained flat relative to our previous report. In Kentucky, automobile manufacturing has increased shifts to catch up with production in the aftermath of earlier hurricane disruptions. However, manufacturing for electric vehicles has had pre-emptive layoffs, anticipating continued soft sales. Several firms expect production and new orders to pick up in the next quarter and, thus, slightly increase their employment levels and capital expenditures in the upcoming months. Overall, the outlook for this sector has improved, with many firms expecting new orders to increase.

Nonfinancial Services

Activity in the nonfinancial services sector has remained unchanged since our previous report. Most contacts indicated that sales had met expectations; however, conditions in logistics were mixed. Contacts in Kentucky noted that sales had fallen short of expectations due to continued softness in overall transportation and consumer purchasing, while in Tennessee a transportation contact reported that they were rushing to deliver goods in anticipation of a January port strike. Housing-related services such as decorations, designs, and moving companies reported that their businesses continued to struggle due to the lack of real estate sales and fewer people moving. The outlook for most businesses has slightly deteriorated due to uncertainty and changes in policy. An architecture firm noted that people were holding off starting projects because of potential changes in the underlying business dynamics. However, a professional services firm noted that, despite the uncertainty, changes in policy could lead to short-term gains.

Real Estate and Construction

Home sales have remained flat since our previous report, with several contacts noting that sales were below expectations. Contacts noted that the main factors slowing the real estate market were high interest rates and high prices. Inventories continue to be low but slightly higher than a year ago. At the same time, average days on the market has increased moderately as buyers have scaled back their desire to purchase at this time. A Kentucky realtor believes houses are still priced too high and will need to come down to generate more movement in the market. Similarly, a Little Rock contact attributed weaker sales to overall costs to purchase, low inventory levels, and elevated prices.

Commercial real estate (CRE) activity has slightly softened since our previous report. Contacts in the St. Louis area have shared that slightly lower CRE activity in general has been due to lower demand. Contacts noted that policy uncertainty, interest rate levels, volatility, and elevated insurance costs continue to be the main challenges for the sector. In Louisville, retail and office spaces have not seen enough absorption, resulting in a decrease of new construction in these sectors. Also, electric-vehicle-related facilities currently under construction have either stopped or slowed their work substantially due to the uncertainty of how future policies will affect the EV industry.

Banking and Finance

Banking conditions have improved modestly since our previous report. Contacts reported a modest increase in the demand for new loans. Although demand varied by type, demand for agriculture loans, credit cards, and commercial and industrial loans increased moderately while mortgage demand remained relatively unchanged. The share of contacts reporting higher delinquency rates has stabilized after rising over the past few quarters. Contacts noted that business customers have missed payments due to short-term cash flow issues, but they are being resolved well before reaching the point of default. Banking contacts reported substantial access to credit outside the banking sector—for households through buy-now-pay-later programs and for businesses through private equity, which has been increasing competition for loans. Contacts continue to report that funding pressures are easing, with less competition for deposits.

Agriculture and Natural Resources

Agriculture production has slightly declined since our previous report. Harvesting is complete and yields have been “all over the place” due to late planting and weather conditions. In western Kentucky the soybean yields were down as heavy rains negatively impacted crop quality. Additionally, lower corn and soybean prices continue to tighten farmers’ margins. Contacts in Kentucky also shared that while cattle prices were very good, inventory was very low. Uncertainty about the passing of the next Farm Bill, high borrowing rates, and potential disruptions to international trade were the main concerns for farmers in the District. Contacts in this sector expect conditions to continue to deteriorate in the upcoming months.