December 2024 Beige Book Interview – Little Rock

Matuschka Lindo Briggs: Chuck, we’ve been traveling together a bit across our region, so I’m anxious to share what we’ve been hearing from contacts. But before we do that, can you start us off with an economic summary of national conditions?

Charles S. Gascon According to the latest Beige Book report, economic activity rose slightly in most districts, and expectations for growth rose moderately across most geographies as well as across most sectors. So, business contacts expressed optimism that demand will rise in the coming months. Consumer spending is generally stable, and most consumer-oriented businesses across districts reported further pressures with respect to price sensitivity among customers. This isn’t just true for those facing households, but also business-to-business transactions, greater difficulty passing on those costs to customers. Input prices were said to be rising faster than selling prices, so that can lead to some profit margin compression. As we look ahead, contacts expect the price of prices to continue to increase at a similar rate that we’re seeing today, but with some upside risks related to expected tariffs.

Lindo Briggs: It seems like we’re trending pretty similar to national conditions. I have not heard much different here in Arkansas since our last podcast. Consumers are very price sensitive right now and being really picky about what they spend their money on.

Gascon: Turning to the labor market, employment levels were flat or up only slightly across most districts. Hiring activity was subdued as worker turnover and layoffs remain relatively low. Contracts expect employment to remain steady or rise slightly in the next year, but many contacts were cautious in their optimism about any pickup in hiring activity.

Lindo Briggs: Thanks for that national update, Chuck. Now let’s share a little of what we’ve been hearing around our seven-state region.

For the most part, I feel like much has remained unchanged in our footprint. I’ve talked to several financial institutions in Arkansas and I’ve started to hear some improvement. They have seen an increase in demand for certain loans. What they are still struggling with are deposits, and as they look six months out, they aren’t really sure where those deposits are going to come from.

I’m also starting to hear that many bankers are being a little pickier on their lending. Not so much pulling back, just being a little more cautious. The main pressures seem to be rising operational costs, rising insurance costs, which I’ve heard over 100 times, and competition for loans and credit from a variety of external sectors outside of banking. What are you hearing?

Gascon: I’m getting the sense that banking conditions have modestly improved, with an increase in loan demand. Although it has varied by type, with demand for mortgages remaining relatively flat. But loans and other parts of the economy have definitely picked up a little bit. Delinquency rates are still elevated a little bit. Business customers have missed payments, primarily due to short term cash flow issues, that have been resolved before reaching the point of default, but they’re still out there. And then we’re also hearing a lot of reports of increasing competition for credit, as you mentioned. It’s also coming from outside the banking sector. So, for households, it’s by now and pay later programs. And private equity investment for businesses. And that’s particularly salient in the in the healthcare sector.

Lindo Briggs: We’ve heard that we’re starting to see a little movement in real estate and construction in our state in the month of November. Some were holding on projects for a while, but now it seems they’ve decided to go ahead and move forward with them. Most of the construction is commercial, although people are still moving into central Arkansas and northwest Arkansas at a steady pace. Our contacts are telling us that most housing is still priced more than double per square footage throughout the state, and we hear similar sentiments in southern Missouri.

What are you hearing about home sales and overall construction in general?

Gascon: Yeah, so we’re in the slow part of the homebuying season, so I tend not to place as much emphasis on the reports of slowing activity because it is likely seasonal and it’ll pick back up in the spring. But housing affordability and the cost of construction do remain top issues among contacts. And generally speaking, when we look outside of the residential market, economic and policy uncertainty is restraining construction activity, as there’s uncertainty about what input costs will look like in the coming year and ultimately what funding costs and interest rates will look like.

Lindo Briggs: A reminder that in this podcast we are sharing the economic conditions collected from outside contacts and reflected in the most recent Beige Book. That report came out yesterday, Dec. 4. You can find it on the St. Louis Fed website under Research. Chuck, I know you did a recent survey to contacts in our district. What were some of the questions and were there any responses that surprised you?

Gascon: This was our first survey since the election, and the comments in our previous survey indicated that there were some businesses that were holding back on their investments and their hiring plans until the election outcome was clear.

Well, the election resolved itself relatively quickly, and not surprisingly we saw that outlook improved for many of our contacts. And so that was generally, you know, what was anticipated was realized. One notable upside surprise was improvements in the manufacturing sector. Some comments that indicate that this was a catch up from disruptions that we saw from the storms over the last couple of months, as well as the dockworker strikes that were anticipated and other strikes that were happening in the economy. So, we’ll have to see how much of that leads into positive momentum going into 2025.

Now, on the downside, what surprised me was, again, the lack of housing transactions does seem to be restraining sales of household durables like appliances and furniture. As fewer people are moving, they just don’t want to buy new things for their home. And so that’s really pulling back on some of that consumer spending. So that’s an area to keep an eye out for going forward.

Lindo Briggs: Thanks for sharing that recent update on the survey. And thank you to all of those who participate. It’s very important for us to see those trends.

We’re full swing into the holidays. And with a late Thanksgiving, we’re all feeling the shopping stress, I know I am. For our January podcast, we will be touching base with retail contacts to hear how consumer spending fared. So far, contacts have not been painting a really bright picture on retail shopping in Arkansas. So, we’ll keep an eye on that. Chuck, I have two questions for you. One, have you heard any changes in behavior when it comes to consumer spending across the district?

Gascon: Overall, the fundamentals for holiday sales do appear to be solid and income growth has been pretty steady. And unemployment rate remains low. And that sets up pretty good fundamentals. And as a result of that industry experts are predicting a pretty good year for holiday sales. However, as we’ve been talking about, you know, price sensitivity remains top of mind.

And so customers are looking for deals on their holiday shopping. So I think for businesses, effectiveness of promotions is really going to determine how, you know, how they’re able to earn those dollars from households. And just to kind of give you an example of what’s going on in holiday spending, we talked to a holiday decorator and they primarily work with wealthy clients and they noted that these clients are opting to decorate without using their services, and they’re not purchasing the volume they normally do. So that does suggest that people are keeping a close eye on their budgets across the income distribution.

Lindo Briggs: Okay, so my second question before we wrap up, what trends will you be focusing on as we head into 2025?

Gascon: If manufacturing and construction are really two cyclical industries in the economy and they tend to be closely linked to things like housing affordability, global trade and ultimately productivity growth in the economy. So, those are the areas I’m going to be keeping a close eye on. If we continue to see improvement in those sectors, I think that’ll bode well for growth as we get into 2025.

Lindo Briggs: Thanks for those updates. We want to thank our listeners also as we close out on our second year, which is hard to believe. We’re continually trying to evolve and we hope to have some fun improvements for the podcast next year.

I also want to thank you, Chuck. It’s so great to collaborate with you, and it’s fun to do this podcast with you. I’d also like to thank our Fed studio crew and Tim Lloyd for all their help with the podcast, we appreciate everything that you do. For a full summary of what is happening in the eighth Federal Reserve District, visit the St. Louis Fed’s website at stlouisfed.org. The next Beige Book release will be Jan. 15, 2025, followed by our podcast Jan. 16. Have a safe holiday season with family and friends and thanks for listening.