Eighth District Beige Book

Summary of Economic Activity

Economic activity across the Eighth District has been flat since our previous report. Employment was unchanged and contacts noted increased retention. Wages continued to increase at a moderate pace. Prices continued to increase moderately; however, price increases have been slightly above expectations. Throughout the District, businesses reported that increased labor and non-labor costs were negatively impacting their profits. Contacts across multiple industries expressed uncertainty about the impact of policy changes and were holding off on investment until further clarity. They also indicated that tariffs would result in higher prices. The outlook has declined from slightly optimistic in our previous report to neutral.

Labor Markets

Employment has remained unchanged since our previous report. Contacts reported that the labor market continued to be tight. Staffing agencies reported that the labor demand pipeline was stronger now than one year ago. Businesses reported fewer job-hoppers and increased employee retention. In Louisville, workers were "sticking and staying" according to employers. Contacts were concerned about a future reduction in available workers due to immigration policies. One construction contractor in Little Rock reported they had already experienced a decline in available workers due to a recent deportation, and another construction firm in Kentucky reported a rise in employee absenteeism.

Wages continued to increase at a moderate pace. Contacts reported that wage growth had stabilized between 3 percent and 4 percent in 2024 and were expecting wages to increase at a slightly slower pace in 2025. A manufacturing contact noted that wage pressure continued to be significant. Leisure and hospitality contacts reported that they had to increase wages to remain competitive and because of higher minimum wages.

Prices

Prices have increased moderately since our previous report, but increases have been slightly above expectations. Survey respondents across the District reported that prices increased by about 2.75 percent during 2024 and expect inflation to accelerate in 2025. The majority of contacts reported that they had some ability to increase prices charged to customers over the next three to six months. Contacts across the District reported higher labor and non-labor costs. Manufacturers reported price increases from suppliers. While this is the typical time of year for some product price increases, contacts noted that tariffs and the threat of tariffs were leading some suppliers, such as lumber, to adjust prices preemptively. Construction contacts noted that material costs continued to be a challenge, with some increases of 15 percent to 20 percent in the first quarter of 2025. A tourism contact noted an uptick in negative feedback regarding price increases and used discounts and promotions to retain business. Auto sales contacts reported that prices had fallen compared with last quarter and that they expect prices to continue to fall over the coming quarter.

Consumer Spending

Consumer spending has declined slightly since our previous report. District auto dealers reported that new and used vehicle sales had been significantly lower than expected despite lower-than-expected prices. They attributed this to cold weather. Retail sales have been mixed. A Little Rock retailer reported continued strong demand as they increased market share, whereas a St. Louis retailer reported fewer customers and smaller orders. A food service distributer reported consumers were buying less, buying less often, and trading down. Leisure and hospitality sales were mixed. Several St. Louis contacts noted that sales had fallen below expectations due to weather conditions.

Manufacturing

Manufacturing activity has increased slightly relative to our previous report. A consumer goods plant in Kentucky reported their operations went from running 24 hours for 5 days to 24 hours for 7 days per week. Manufacturers in Arkansas noted that the industry was flat and the market was soft despite their expectations that things would pick up early in the year. A St. Louis manufacturer noted that sales had fallen below expectations, attributing lower shipments in the first week of the period to snowstorms, and that the rebound in the remainder of the quarter would not be enough to catch up completely. Contacts across the District noted price increases from suppliers and concerns about tariffs further increasing input costs that would negatively impact their competitiveness in the market. A St. Louis manufacturer noted that, while they were seeing favorable business indicators and demand, they continued to struggle to hire qualified employees.

Nonfinancial Services

Activity in the nonfinancial services sector has declined slightly since our previous report. Transportation and logistics contacts noted a slight decline in activity due to lower demand; however, they expected conditions to improve in the second quarter. A contact in the healthcare sector noted that demand had been stable for the past three months; however, they expected a decline in revenue soon due to changes in federal healthcare policy. A dental service organization reported recent strong activity. A legal services business reported continued high demand for their services, whereas another business reported lower demand and an uptick in late payments and failed/declined payments.

Real Estate and Construction

Residential real estate activity has remained flat since our previous report. While lower seasonal activity was expected, contacts were expecting slightly stronger activity during these months than what has materialized, noting that high rates were holding back consumers. Expectations for the spring were optimistic, with a real estate agent in St. Louis noting that they were already seeing residential sales pick up dramatically in February and that agents were expecting a big influx of listings.

Commercial real estate has improved slightly. Multifamily demand remained solid; however, investors remain in a holding pattern due to cold weather and policy uncertainty. Retail property demand has been steady, continuing its recent upward trajectory. Some contacts reported a slight uptick in office space demand as businesses who went exclusively remote begin to make their way back into physical space. Construction has been slightly slower than expected: Construction costs, higher interest rates, and insurance costs are having a large impact on underwriting.

Banking and Finance

Banking activity has remained steady, with some increased optimism across contacts due to expected regulatory changes and net interest margin improvement. Loan demand has remained flat, despite higher expectations; nevertheless, contacts expect loan demand to pick up slightly. Commercial lending pipelines looked positive for several contacts, who noted optimism from their clients. Bankers noted that credit card delinquencies were on the rise and that past-dues and loan defaults were expected to continue to rise throughout 2025 as customers continue to spend more than their earnings and are reaching credit limits.

Agriculture and Natural Resources

Agriculture conditions have deteriorated since our previous report and remain historically weak. A contact in Memphis noted that the current agriculture market was in a worse spot than the same time last year, with low cash flows due to high input costs and low commodity prices. Contacts noted that tariffs, policy uncertainty, and lack of clarity regarding Farm Bill safety nets were negatively impacting the sector. Some farmers also reported having no expectation of profits in the 2025 crop year, and others have gone out of business. Bankers expressed concern about this sector, noting that they must be cautious; many have tightened their credit standards for agriculture lending. Farmers in Northwest Tennessee reported they would have to clean farms before planting could take place this year due to major flooding in the area.