Beige Book: Arkansas, regional economy grew at modest pace, in step with rest of nation

Economic activity in Arkansas and the Federal Reserve’s expansive Eighth District grew at a “modest pace” in the past few months, highlighted by robust real estate activity and improving loan conditions among local and regional banks, according to the Fed’s Beige Book report released Wednesday (March 3).

The Beige Book report for St. Louis’ Eighth District, which includes Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, the eastern half of Missouri and West Tennessee, offers a snapshot of business anecdotal information of key economic activity in different sectors of the sprawling district led by St. Louis Fed chief James Bullard.

Although there was not much specific news on the Arkansas economy, the report did note that the Little Rock metropolitan area experienced a 17.4% spike in residential homes sales in January compared to a year ago.

“Over half of contacts have reported higher demand and lower inventory in this current quarter. Residential construction activity continued to be positive throughout most of the District. The general sentiment from contacts was positive,” the highly-watched regional economic report said. “Compared with the same time a year ago, activity was higher this quarter and contacts expected activity to be higher in the next quarter.”

The report also noted that “the entire region is struggling with finding skilled and qualified workers during a period of low unemployment.”

The Beige Book survey complements Wednesday’s report by U.S. Bureau of Economic Analysis (BEA) that showed Arkansas’ real gross domestic product (GDP) output in the third quarter grew at a modest 1.9% as the state’s economy produced more than $123 billion in business growth.

According to the second revision of the nation’s real gross domestic product, or GDP, last week, the U.S. economy advanced at a tepid annual rate of 1% in the fourth quarter of 2015. The BEA is expected to release its third and final revised GDP numbers on March 25. The Atlanta Federal Reserve’s updated GDPNow model forecast for real GDP growth in the fourth quarter of 2016 is now expected to come in at 1.9%, the same as the Arkansas’ and U.S. GDP growth rate in the third quarter.

Below are the highlights of key sectors from the St. Louis District.

• Employment, Wages and Prices
A survey of business contacts indicated that wage growth was strong, while employment and prices grew at a modest pace. On net, 56% of contacts reported that wages during the past three months were slightly higher or higher than during the same time last year.

Consistent with previous reports, job growth remains modest: On net, only 20% of contacts reported higher employment relative to the same time last year. Inflation pressures also remain modest: On net, only 21% of contacts reported that prices charged to customers were slightly higher than the same time last year, which is a slightly lower share than in previous reports.

• Manufacturing
The general sentiment among manufacturing contacts is that activity has remained unchanged since our previous report. Several companies reported capital expenditure and facility expansion plans, including firms that manufacture chemical products and furniture. However, reports from food and beverage manufacturers were mixed, with several reports of expansions offset by a few large facility closures.

Firms tied to the energy industry, including manufacturers of mining machinery and steel pipes, continued to report declines in activity. In a recent survey of manufacturers, a majority noted that production, capacity utilization, and new orders were either at the same level or at lower levels in the first quarter relative to a year ago, with responses split evenly between the two. Contacts expect production, capacity utilization, and new orders to be unchanged relative to one year ago.

• Consumer spending
Retail growth has been flat since the previous reporting period. Most survey respondents reported no change in year-over-year sales and expect the same next quarter. However, multiple contacts noted that low gasoline prices have been beneficial to their business by either lowering costs or increasing consumer spending.

Reports from auto dealers indicated a recent slowdown of sales following a strong December. The majority of auto dealers reported that current-quarter sales have been slightly lower compared with a year earlier but that these sales were still in line with expectations.

• Real estate and construction
Residential real estate activity continued to expand at a robust pace. Compared with the same period in the previous year, January home sales increased on a year-over-year basis: 17.4% in Little Rock, 2.8% in Louisville, 3.1% in Memphis, and 23.4% in St. Louis. Over half of contacts have reported higher demand and lower inventory in this current quarter.

Residential construction activity continued to be positive throughout most of the District. The general sentiment from contacts was positive. Compared with the same time a year ago, activity was higher this quarter and contacts expected activity to be higher in the next quarter.

Commercial real estate market activity has strengthened since our previous report. Contacts reported demand across all sectors was slightly higher than one year ago and expect higher demand overall going forward, especially in the industrial sector.

• Banking and finance
A survey of District banks reported improving conditions. Loan demand was stronger for mortgages and commercial and industrial loans. Credit standards were unchanged to somewhat tighter for all loan categories, while loan delinquencies were unchanged to slightly lower for all loan categories, and creditworthiness of applicants improved.

• Agriculture and natural resources
As of the end of January, almost 93% of the District winter wheat crop was rated fair or better. Red meat production in 2015 was 6% higher than in the previous year, an increase that has been explained, in part, by lower feed costs, although meat prices also fell during the year. January District coal production was 32% lower than in January 2015, continuing a decline that industry contacts attribute to low alternative fuel prices.

The Federal Open Market Committee will hold its two-day policy meeting on March 15-16. Last month, Bullard criticized the FOMC’s normalization policy, calling it “unwise” to continue the central bank’s monetary policy for continued interest rate hikes with recent declines in inflation expectations caused by declining oil prices.