Federal Reserve Bank of St. Louis
Summary of Economic Activity
Economic activity across the Eighth District has remained unchanged since our previous report, although demand continues to show some signs of slowing. Prices continued to increase modestly, with some input costs remaining unchanged or decreasing. Consumer spending reports continued to indicate that higher prices for goods are weighing more heavily on spending than higher prices for services or experiences. Across the District, contacts expected they will maintain employment levels in the upcoming months. Manufacturing activity continued to decrease slightly with fewer new orders and lower production. Residential and commercial real estate remained unchanged, yet construction activity had picked up. Banking sector contacts observed recent favorable changes to balance sheets due to higher bond values and lower deposit rates. Agriculture sector contacts reported some stress due to low commodity prices despite good yields and slightly lower input costs. While the outlook has remained slightly pessimistic overall, it has modestly improved for many.
Labor Markets
Employment has remained unchanged since our previous report. Contacts noted that hiring pressures had eased, with lower turnover, and that more people were applying for open positions. But contacts in several sectors reported that many applicants were not qualified and hiring skilled labor has continued to be a challenge. A Louisville real estate contact noted labor for housing improvements, such as painters and drywall installers, was hard to find. Similarly, hospital contacts reported that the market for nurses and physicians continued to be tight and that they have put greater emphasis on company culture and employee recognition to increase retention. Several tourism and hospitality contacts in the St. Louis area reported that employment levels would be flat to slightly higher in the upcoming months. Agriculture businesses reported that most of the contraction and rightsizing had already occurred over the past six months.
Wage growth for most contacts has remained unchanged, settling back to around three percent, and was anticipated to remain around that rate over the next six months. However, some contacts reported that their lowest-wage workers in the past year had accelerated wage growth, which may continue to put upward pressure on wages.
Prices
Prices have continued to increase modestly since our previous report. Contacts reported that not all input prices were increasing, but rather that some of the prices that were increasing reflected suppliers who postponed price adjustments over the past year or two. Some costs were slightly lower, and some prices charged to customers were flat to slightly lower. Contacts across many sectors reported higher insurance costs. A healthcare contact reported that costs of pharmaceuticals and high-end medical equipment continued to climb, though pricing contracts with their customers prevented passing on these costs. One restaurant in Arkansas noted that they were increasing prices despite their concern that it could negatively impact customers. A food provider noted that prices to consumers were flat despite lower costs of feed and energy because these lower costs did not offset increases in other costs. A trucking contact noted that fuel prices had come down significantly and that, because of low demand, vendors supplying goods to the trucking industry weren’t raising prices. A fast-food contact reported that a combination of discounted prices and higher wages was continuing to squeeze profit margins.
Consumer Spending
Consumer spending has remained unchanged since our previous report. Retail spending continues to be slightly below expectations. Car dealerships continued to note slower foot traffic. Several casual restaurants noted that sales per person remained a few dollars lower than a year ago and that customers have reduced their frequency of eating out. Hotels across the District reported that room rates were unchanged, occupancy rates had been steady, and bookings were looking strong for the upcoming months. Several hospitality contacts noted that demand was higher than a year ago and, in most cases, had met expectations. However, concession spending at their venues was lower and visitors appeared more sensitive to higher goods prices relative to the prices of their activities.
Manufacturing
Manufacturing activity has decreased slightly since our previous report. Contacts in the consumer packaged-goods industry continued to hold higher levels of inventory due to weaker consumer demand. Contacts reported that inventories were also elevated in anticipation of disruptions stemming from the port worker strike, which was resolved quickly. Across the District, production and new orders have slightly decreased. A plastics packaging manufacturer reported slower orders and that his orders typically lead other manufacturing activity by about three months. A spirits producer cut their capital expenditures budget by 50 to 60 percent from what was expected prior to entering the fiscal year. Automobile manufacturers in Kentucky reported slowing production due to supply chain disruptions stemming from storm devastation affecting plants in North Carolina.
Nonfinancial Services
Activity in the nonfinancial services sector has decreased slightly since our previous report. Contacts in the transportation industry indicated slower growth due to softening demand. A St. Louis trucking contact reported lower demand and higher operating costs that have been tempered by lower fuel costs. An air cargo contact reported that volumes were depressed and continued to weaken. Airport contacts were expecting passenger demand to improve in the upcoming months, especially for leisure travel, as they had recently seen less leisure travel relative to business travel. In the healthcare sector, lack of high-skilled workers and high costs remain a challenge. A large hospital in the District reported recruiting workers from other states and outside the region. Hospital contacts also reported greater discipline around capital spending, and a contact at a rural hospital in Arkansas reported that reimbursements were down while costs were trending higher.
Real Estate and Construction
Residential real estate has remained unchanged, on net, since our previous report. In the St. Louis area, sales and listings remained stable. In Tennessee, existing inventories of homes for sale have continued to increase and contacts reported that these homes were staying on the market longer. In Arkansas and Northen Mississippi, contacts noted that the residential real estate market had improved over the past month. Contacts across the region reported that the recent decline in interest rates is expected to attract more potential homebuyers, with the concern that it will place upward pressure on property prices, as buyers compete for a limited supply of homes.
Commercial real estate has slightly improved; contacts reported that construction activity was picking up. Developers in Arkansas noted that a project previously on hold had actively moved forward in recent weeks. Many multifamily complexes across the District are under construction, and rental units continue to be in high demand. Contacts also reported industrial construction is expected to remain strong due to demand for data centers and power plants.
Banking and Finance
Banking activities have remained stable since our previous report. Loan demand growth continued to be mixed. While mortgage originations have remained unchanged, consumer loans have slightly increased. Bankers have reported increased inquiries for loans and that they were able to adjust deposit rates downward without receiving much pushback from customers. While past-due credit card payments have been increasing, bankers’ credit quality forecasts continued to be favorable. Bankers reported positive moves in their capital and balance sheets due to favorable changes in bond values. Bankers indicated that larger commercial loans were tied to a variable rate; thus, customers in that category were expected to see some immediate relief in their interest rate expense.
Agriculture and Natural Resources
Agriculture production has been stable since our previous report; however, overall sector conditions have weakened. Contacts from Mississippi reported that, even with very good yields, most farmers will struggle to break even this year. Across the District, crops were healthy and yields were high; however, input prices remained high and commodity prices were low. The decrease in feed prices has been positive for protein producers, yet it failed to offset other cost increases. Contacts also noted a minimal effect of recent hurricanes, and they expected the cotton harvest to be strong despite the rains, although crops’ milling quality has been negatively impacted in Arkansas.