Eighth District - St. Louis
Beige Book
November 30, 2016

Summary

Information received from business contacts suggests that economic conditions in the Eighth District have modestly improved since our previous report. Employers reported continued tight labor market conditions, moderate hiring, and moderate wage pressures. Price pressures remain modest as businesses remain reluctant to increase selling prices. Consumer spending activity was generally mixed. Real estate activity was unchanged for residential properties while activity improved modestly for commercial property types. District bankers continued to report strong loan demand, but the outlook slightly deteriorated.

Employment, Wages, and Prices

Contacts reported moderate growth in employment and wages. Among businesses surveyed in mid-November, 40 percent reported employment was higher or slightly higher than at the same time last year, and over half expect their firm to increase employment over the next twelve months. Contacts cited growth of sales and a need for skills not possessed by their current staff as the top factors behind their hiring plans. Contacts cited an inability to find workers with the required skills as the top factor restraining hiring plans. The tight labor market has led to moderate growth in wages. Over half of contacts reported wages were higher or slightly higher than during the same period last year, and 60 percent reported increasing wages and salaries to attract or retain employees, particularly those in professional and technical, production, and administrative positions.

Prices

A survey of business contacts indicated that consumer prices increased modestly. Over half of contacts reported non-labor input prices were higher or slightly higher than a year ago. However, only a third of contacts reported prices charged to customers were higher or slightly higher than the same period last year. Several contacts in the construction industry reported higher material costs in Louisville, while a manufacturing contact in St. Louis reported raw material pricing remained low. House prices across the District increased moderately, with several contacts citing low inventory levels. As for commodity prices, cash prices for rice, corn, and soybeans remained relatively unchanged since the previous report, while cash prices for coal increased moderately and prices for sorghum decreased slightly.

Consumer Spending

Reports from general retailers, auto dealers, and the hospitality industry paint a mixed picture of consumer spending activity in the District. General retailers in Louisville and Memphis indicated a slowdown in general retail sales since the previous report. Multiple auto dealers across the District also reported a slowdown in sales, which some attributed to the uncertainty caused by the presidential election. Most dealers expect an increase in sales and inventory in the next quarter. In addition, several dealers also noted a shift in demand toward used vehicles. Contacts in the hospitality industry in East Arkansas continued to report favorable occupancy rates.

Manufacturing and Other Services

Manufacturing activity has increased modestly since our previous report. The majority of contacts reported that production and capacity utilization increased in the fourth quarter relative to one year ago and that new orders were about the same or higher. Several companies reported capital expenditure and facility expansion plans in the District, including firms that manufacture transportation equipment, machinery, and fabricated metal products. In particular, an aircraft manufacturer announced a large, multi-year expansion. Reports from manufacturers of paper products were mixed. One manufacturer of pulp products for the personal care industry announced a major investment in new machinery to meet demand, while a manufacturer of paperboard products for packaging announced a plant closure. In the steel industry, contacts reported that increased demand from the automotive sector has partially offset the decline in demand from the energy sector, but that oversupply remains a concern. Nearly all contacts surveyed expect production, new orders, and capacity utilization to increase in the first quarter of 2017 relative to the first quarter of 2016.

Reports from District’s service sector have been positive since the previous report. About two-thirds of contacts reported sales met or exceeded expectations in the current quarter. Several firms that provide information technology services, leisure and hospitality services, and healthcare announced plans to build new facilities or expand current facilities and hire new employees. Reports from retail services were mixed, with restaurant and grocery store closings and openings reported across the District. Reports from the transportation sector were positive. A Memphis contact reported revenues are up, and Little Rock contacts reported shipment increases have outperforming seasonal highs.

Real Estate and Construction

Residential real estate activity has been relatively flat since our previous report. Seasonally adjusted home sales declined marginally in Louisville, Memphis, and St. Louis from September to October but ticked up in Little Rock. Year-to-date home sales remained strong in all four MSAs, increasing by 10 percent in Little Rock, 7 percent in Louisville, 8 percent in Memphis, and 5 percent in St. Louis compared with the same time last year. Most real estate contacts reported fourth-quarter demand for single-family homes has remained flat, but more than half expect demand to increase slightly in the first quarter of 2017. Residential construction has strengthened moderately since our previous report. The majority of local real estate contacts reported seeing a slightly higher level of construction than a year ago, and about half expect this level of activity to continue into the next quarter.

Commercial real estate activity has improved modestly since our previous report. Most survey respondents reported that demand for office and retail properties was about the same or slightly higher than a year ago, while a slim majority indicated that demand for industrial properties has been slightly higher. These trends are expected to continue in the coming months. Commercial construction activity increased modestly, as a majority of local construction contacts indicated an increase in demand for office and retail properties so far in the fourth quarter; they also expect demand to carry into the first quarter. Reports on speculative construction projects were mixed. Many local real estate contacts reported no changes in the level of speculative building. However, some respondents indicated an increase in office speculative building in St. Louis and industrial speculative construction in Louisville.

Banking and Finance

A survey of District banks indicates growth in loan demand during the current quarter with some signs of slowing demand in the first quarter of 2017. District bankers reported that demand for mortgages and commercial and industrial loans has been strong during the fourth quarter. Contacts expect strong demand for commercial and industrial loans to continue into 2017; however, there was an uptick in the number of bankers expecting the demand for mortgages to slow slightly in early 2017. The demand for auto loans has been generally unchanged; again, there was an uptick in the number of bankers expecting the demand for auto loans to slow slightly. Credit standards were unchanged in all loan categories. Creditworthiness of applicants was slightly lower for agricultural loans and unchanged for all other loan categories.

Agriculture and Natural Resources

Forecasted corn and rice production are now slightly lower than projected in September. Meanwhile, cotton and soybean production forecasts are up slightly. Overall, contacts believe production levels will not provide any relief from the environment of low crop prices, which means farmer solvency issues will only worsen heading into the next crop year. Year-to-date coal production through October is down 20 percent from one year ago. However, October coal production is up 10 percent from the September level and slightly higher than one year ago. Contacts noted that the outlook has improved modestly in recent weeks; however, the supply and low price of natural gas continues to temper long-run growth prospects.

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