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Beige Book Report: St Louis

September 12, 2018

Summary of Economic Activity
Economic conditions have again improved slightly since our previous report. Firms indicated modest increases in employment despite continued difficulties finding workers. Wages and nonlabor costs increased modestly, and contacts reported modest growth in prices charged to consumers. Consumer spending activity improved slightly. Manufacturers reported no change in production but reported declines in capacity utilization and new orders. Residential real estate contacts noted that low inventories continue to limit sales. Construction activity increased modestly as contacts stated concerns over labor shortages and rising prices of building materials. District bankers reported little change in loan demand but expect an uptick in the fourth quarter. Agriculture conditions declined modestly, and local farmers expressed anxieties over low commodity prices. Overall, the outlook among contacts weakened slightly but remained optimistic. On net, 20 percent of contacts expect conditions for the rest of 2018 to be better relative to a year ago.

Employment and Wages
Employment has grown modestly since the previous report. On net, 25 percent of survey respondents indicated that employment was higher than a year ago. Contacts reported shortages of qualified job candidates across a variety of sectors, including construction, transportation, and healthcare. Organizations continued to undertake initiatives that attempt to address the current skills gap, such as firms forming partnerships with local high schools to prepare students for a technical career. Small business contacts highlighted the tight labor market as their main challenge, citing difficulties matching compensation and benefits that larger employers offer.

Wages have increased modestly since the previous report. On net, 40 percent of survey respondents indicated that wages were higher or slightly higher than a year ago, and 39 percent reported increases in labor costs. Contacts in construction and transportation reported that labor shortages have led to wage increases in those industries. Small business wages in St. Louis grew moderately.

Prices have continued to increase modestly since the previous report. On net, 32 percent of business contacts reported that prices charged to consumers increased relative to a year ago, about the same share as three months prior.

Nonlabor input costs also rose modestly. On net, 33 percent of survey respondents indicated that costs were higher than the same time last year. Multiple manufacturers reported facing elevated input prices linked to steel and aluminum tariffs as well as increased freight costs. Many of these contacts indicated they have passed or intend to pass along these costs to their customers.

Agricultural food prices have shown slight to modest growth across the District since the previous report, yet remained depressed. The price movements of other commodities were mixed. Steel prices have declined slightly since mid-July but remain elevated compared with a year ago. Coal prices were unchanged.

Consumer Spending
Reports from general retailers, auto dealers, and hoteliers indicate that consumer spending has slightly increased since our previous report. Real sales tax collections increased in Missouri, Arkansas, Tennessee, and Kentucky relative to a year ago. Retailers from northeast Arkansas reported year-to-date sales well above 2017 levels, and they expressed a positive outlook for the remainder of the year. Reports from auto dealers were mixed: Some contacts indicated that sales were higher than anticipated while others reported that sales failed to meet expectations. Multiple dealers noted that higher interest rates have posed a challenge to their business. Hospitality contacts in Missouri reported that sales exceeded expectations, and they continued to express a positive outlook for the coming months.

Manufacturing activity has been mixed since our previous report. District contacts, on net, indicated that new orders and capacity utilization decreased in the third quarter relative to one year ago while production remained unchanged. However, survey-based indexes suggested that Arkansas and Missouri manufacturing activity continued to expand from June to July, and survey respondents expressed an optimistic outlook for the fourth quarter. Several companies reported new capital expenditure and facility expansion plans, including firms that manufacture auto parts, food and beverage products, and medical devices.

Nonfinancial Services
Activity in the services sector has improved slightly since the previous report. On net, 37 percent of survey respondents indicated dollar sales in the current quarter increased relative to a year ago, and 32 percent expect next quarter's sales to be higher as well. The number of posted vacancies for nonfinancial services occupations in July increased moderately across Louisville, Memphis, and St. Louis. Transportation and logistics activity has slightly improved and firms expanded investment within the District. Local contacts continued to report a shortage of truck drivers. A Kentucky rail transporter voiced concerns that tariffs may reduce demand in the upcoming grain season.

Real Estate and Construction
Residential real estate activity has increased slightly since the previous report. Seasonally adjusted home sales for July were modestly above prior-month levels across the District's four largest MSAs. Local contacts indicated that inventory shortages continued to hinder sales, but they expect inventory levels to improve in the fourth quarter.

Residential construction activity improved modestly. June permit activity within District MSAs was slightly higher relative to the previous month, and about 40 percent of survey respondents, on net, indicated that they expected residential construction to increase in the next quarter. Local contacts continued to report constraints caused by a shortage of skilled workers and rising prices of building materials.

Commercial real estate activity has improved modestly since the previous report. Contacts noted increased demand for most property types compared with a year ago. They expect these trends to continue into the final quarter of 2018.

Commercial construction activity improved slightly. Survey respondents indicated healthy demand for most property types. Contacts in Memphis and Little Rock noted that hotel construction activity remained robust.

Banking and Finance
Banking conditions in the District have remained stable since the previous report. Loan demand in each major lending category was little changed relative to year-ago levels, but bankers, on net, expect stronger demand in the fourth quarter. While overall delinquencies decreased only slightly on a year-over-year basis, credit card delinquencies declined dramatically. On the other hand, commercial and industrial loan delinquencies are expected to increase slightly next quarter. Lending standards for such loans rose sharply and are expected to continue tightening through the remainder of 2018. A large share of District bankers reported strong gains in banking sector employment, as well as new branch openings and expanded market areas served.

Agriculture and Natural Resources
District agriculture conditions have deteriorated since the previous report. Compared with late June, the percentages of corn and soybeans rated fair or better declined moderately, while those for cotton and rice increased modestly. Relative to the previous year, however, the percentage of District rice rated fair or better was modestly higher, while corn and cotton was unchanged. The percent of soybeans rated fair or better was modestly below its August 2017 value. Farmers continued to express concerns over low agricultural commodity prices resulting from the trade dispute between China and the United States. Contacts in Missouri and Indiana indicated that farmers did not lock-in pre-tariff pricing for a majority of their soybean crop, leaving them exposed to current market conditions.

Natural resource extraction conditions rose slightly from June to July, with seasonally adjusted coal production increasing 0.6 percent. July production was 4.1 percent higher than a year ago.

For more information about District economic conditions, visit: https://research.stlouisfed.org/regecon/