Federal Reserve Bank of St. Louis
Summary of Economic Activity
Economic activity across the Eighth District has continued to increase slightly since our previous report. Labor market conditions were generally unchanged. Inflation pressures increased modestly, although firms continue to note higher costs are compressing profit margins as they are unable or unwilling to increase prices to customers. Reports on consumer spending indicate a modest uptick, with some contacts attributing stronger-than-expected activity to an earlier Easter holiday. The outlook among contacts was neutral to slightly optimistic, which is generally unchanged from our previous report, but better than one year ago.
Labor Markets
Employment has remained unchanged since our previous report. The labor market continues to be tight, particularly in rural areas and in the manufacturing and construction sectors. In contrast, banking and professional services contacts have seen upticks in applicants and less turnover from a year ago. Multiple contacts reported adjusting operating hours to reduce their overall wage bill and/or total headcount.
Wages have risen slightly since our previous report, with most contacts reporting a small increase in labor costs. In rural areas of the District, wage disparities between smaller businesses and national firms are an ongoing challenge as smaller firms are struggling to match the higher wages. For example, a food processing firm increased their labor budget by 6 percent to cover merit-based increases to prevent labor turnover. Large District employers continue to reach contract agreements with unions. A large St. Louis distributor reached a contract agreement with its union employees, and St. Louis school district employees were able to secure the largest wage increase in twenty years. However, a pilot union took steps toward a strike.
Prices
Prices have increased modestly since our previous report, as contacts are broadly feeling the pressures of increases in both labor and nonlabor costs. Small business contacts reported profit margins compressing on higher costs and an inability to raise final prices for consumers. A restaurant contact reported that even though food and labor costs have risen recently, final prices have not yet been adjusted. A textiles contact echoed this sentiment, but indicated the firm still lacks pricing power over brands and retailers; so, increases in final prices have not kept up with increases in costs. A retail contact reported that her small business insurance costs have doubled. In a similar vein, an insurance agent reported that homeowners are seeing increases in annual insurance premiums of 20 to 25 percent.
Consumer Spending
Consumer spending has risen modestly since our previous report. Restaurant and hospitality contacts have generally seen stronger-than-expected business activity, while automotive and retail contacts have generally reported that sales did not meet expectations. A District restaurant contact noted that consumer spending is increasing marginally as delivery services are boosting sales. A fast-food contact noted customers were showing preferences for specialty products, increasing dollar sales per customer. A St. Louis hotel contact reported that, while overall activity is higher relative to last month, activity in the business travel segment has fallen short of expectations. A small clothing retailer reported strong growth in sales, which they attributed to an earlier Easter holiday. A Little Rock boat retailer stated they are cutting profit margins to sell their products due to a lack of demand and plentiful inventory. A Kentucky auto dealer noted that so far this year both new and used car sales have been low. However, they're optimistic activity will increase in the later spring and summer months on expectation of lower auto loan rates.
Manufacturing
Manufacturing activity has slightly increased since our previous report. Firms in Arkansas and Missouri reported a modest increase in inventories and delivery lead times. Reports of supply chain disruptions increased slightly. One contact noted the Red Sea shipping disruptions have resulted in higher prices, and another firm noted a 2-week delay on a large equipment order due to the bridge collapse in Baltimore. A brewery contact noted that their suppliers have excess capacity and are waiving some fees to attract new business. A food manufacturer reported revenues and volumes were down in the first quarter due to smaller orders from restaurants, but private label grocery store orders remain strong.
Nonfinancial Services
Activity in the nonfinancial services sector has improved slightly since our previous report. The transportation outlook was largely unchanged. Airports across the District remain optimistic that business and leisure travel will remain strong during the remainder of the year. Smaller trucking firms reported financial challenges stemming from lower prices and volumes, which has made it harder to compete with larger firms. Across the District, healthcare contacts spoke about persistent shortages of medical supplies and drugs. An Arkansas funeral services contact reported fewer traditional funerals and more cremations. They attributed this switch to lower-cost services to a growing number of uninsured or underinsured individuals at time of death.
Real Estate and Construction
Residential real estate activity has increased at a moderate pace. Real estate contacts noted signs of an early start to the spring homebuying season. District bankers reported that mortgage loan volumes in February and March were higher than the same period last year. A renovation and remodel contact noted a strong pipeline of projects, although with some shift toward lower-cost improvements.
Commercial construction activity has been relatively unchanged. An architect in the Little Rock area reported their firm is busier than ever, with projects coming from public funds. In contrast, traditional commercial work has slowed significantly. A construction contact noted demand for transportation, municipal, and lodging projects remains high, while demand for retail and higher education construction projects has slowed. Similarly, an engineering contact noted that so far this year is shaping up to be stronger than expected and the outlook is improving.
Banking and Finance
Banking conditions have been generally unchanged since our previous report. Contacts reported little change in deposits, but the market remains competitive. Total loan growth has decreased slightly as banking contacts reported being more selective and focused on maintaining existing relationships. Commercial and industrial loans have decreased. However, the pace of consumer lending growth continues to accelerate. A large retailer noted a considerable uptick in credit card usage, and banking contacts noted customers continue to open new lines of credit. Delinquency rates remain low, but some contacts noted higher delinquencies on auto and small business loans.
Agriculture and Natural Resources
District agriculture conditions have remained unchanged since our previous report. Total acres planted as of the end of March are about the same as this time last year. However, contacts in Arkansas said they're closely watching weather over the next few weeks; if conditions remain wet, that will limit future plantings and may force producers to plant later than is ideal. The distribution of crops is expected to shift: The number of acres of corn planted decreased, especially in Arkansas and Mississippi, while plantings of cotton, rice, and soy increased. For corn and cotton, this marks a return to 2022 acreage. Several District contacts reported feeling price pressures due to higher travel costs of bringing in H2A visa labor. Contacts also noted difficulties accessing farming equipment due to high costs and delays, particularly for repairs.