Beige Book report shows moderately expanding regional economy, Arkansas’ labor market tightening as home sales soar

The Federal Reserve’s monthly Beige Book report for the Eighth District released Wednesday (Oct. 19) shows economic conditions across the regional economy have modestly improved from a month ago, highlighted by double-digit residential home sales in the Little Rock and Northwest Arkansas real estate markets.

The October 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 subjective information of key economic activity in different sectors of the sprawling district led by St. Louis Fed chief James Bullard.

Prepared by the Federal Reserve Bank of Dallas based on information collected on or before October 7, 2016, the 12 regional district reports also suggest that national economic activity has continued to expand during the reporting period from late August to early October.

“Most districts indicated a modest or moderate pace of expansion; however, the New York district reported no change in overall activity. Compared with the previous report, the pace of growth improved in the St. Louis, Kansas City, and Dallas districts. Outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several districts,” the report said.

The regional report for the expansive St. Louis district shows that activity in the manufacturing and transportation sectors continues to be mixed, but other parts of the service sector-driven economy remains positive.

“Employers reported moderate hiring. Wage pressures were also generally moderate, but with stronger growth for certain entry-level positions,” the report said. “Consumer spending grew modestly, with auto dealers noting improving sales and a somewhat optimistic outlook for the remainder of the year. Real estate activity improved for both residential and commercial property types. District bankers continued to report strong loan demand.”

While showing a moderately expanding U.S. economy that is slowly picking up steam, the Beige Book report also illustrates why the Federal Reserve is reluctant to raise interest rates for federal funds beyond 0.25% to 0.5% – especially with a tightening labor market in key sectors of the economy. At the end of September, the Bureau of Economic Analysis (BEA)reported that real gross domestic product (GDP) in the second quarter grew at a lethargic rate of 1.4%, slightly better than expected but well below Atlanta Fed’s original GDPNow forecast of 2.3% economic growth.

Next week, BEA will release its first estimate for GDP growth in the third quarter. The Atlanta Fed’s GDPNow is now forecasting weak expansion of only 2% for the third quarter, well below the 2.8% from two weeks ago and well off rosier expectations of 3.2% two months ago.

Those projections may have been affected by a World Trade Organization forecast last month that the global economy is contracting. According to the latest WTO estimates, global trade will grow slower than expected in 2016, expanding by just 1.7%, well below the April forecast of 2.8%.

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

EMPLOYMENT, WAGES, PRICES
Despite continued tightening in local labor markets, wage growth and employment growth has generally been moderate. Still, contacts across the District reported high demand for labor in some industries, particularly in manufacturing, construction, healthcare, and financial services. Wages for entry-level positions in these industries have also generally increased faster than wages in other sectors.

“A contact in Little Rock reported widespread difficulties in filling vacant positions, especially those in the skilled trades, while a contact in St. Louis reported difficulties in filling vacant information technology positions,” the report said of Arkansas’ job market, where unemployment is at a near all-time low of 3.9%.

CONSUMER SPENDING
General retail and auto sales have grown modestly since the previous report. Most businesses contacts throughout the District expect sales to be higher or slightly higher in the fourth quarter.

“After a months-long slowdown in general retail sales, Arkansas sales seem to have picked up since our previous report,” according to the October survey. “Multiple Arkansas auto dealers reported improved sales activity compared with 2015. Moreover, dealers anticipate sales will continue to increase toward the end of the year.”

MANUFACTURING, OTHER BUSINESS ACTIVITY
Manufacturing activity across the district has remained since the August Beige Book Report. Several manufacturers reported capital expenditure and facility expansion plans in the District, including firms that manufacture primary metals, furniture, and food products. In particular, a steel manufacturer announced a large expansion to meet demand from the automotive industry, and a furniture manufacturer opened a new facility to meet growing demand.

In contrast, reports from manufacturers of electrical equipment were mixed. One manufacturer of electrical components announced that it would shut down a production line, while another announced it would close a facility. Similarly, a manufacturer of construction and mining machinery announced layoffs in response to weak demand.

REAL ESTATE AND CONSTRUCTION
Residential real estate activity improved moderately since the previous reporting period. August home sales were strong, increasing by 13% in Little Rock and St. Louis and 14% in Memphis. Louisville saw a much more modest 3% increase in home sales. Inventory of homes for sale continued to decrease in most areas even though residential construction activity increased moderately. August building permits were up in all four major MSAs compared with a year earlier; approximately two-thirds of all MSAs in the District saw an increase. A few Arkansas real estate contacts reported that much of the new construction in their area is for pre-sold homes.

Commercial real estate activity continued to improve. Little Rock and northwest Arkansas multifamily markets remained strong, and a Louisville real estate contact indicated that the local industrial market is tight. On the other hand, a northwest Arkansas contact noted that it is taking longer to lease retail and office properties. Little Rock and Memphis also saw continued interest in multifamily construction. In contrast, a northwest Arkansas contact noted that construction has slowed recently, partly because multiple projects are already underway. Several projects for senior housing facilities in the District were announced or broke ground.

BANKING AND FINANCE
Banking conditions in the Eight District were strong, and lending growth has continued pattern of robust growth in 2016. The pace of loan growth among District banks remains significantly higher than the national rate and was stable relative to last quarter. Total outstanding loans for a sample of approximately 80 small and mid-sized District banks rose by 23% over the past 12 months. Notably, real estate lending accounted for the largest fraction of total loan growth, expanding by 20% over the same period. Commercial and industrial loans rose strongly, up 28% compared with year-ago levels.

AGRICULTURAL AND NATURAL RESOURCES
Contacts expect yields of corn, cotton, and soybean crops to be at record levels across the District as a result of timely rains during the growing season. Meanwhile, rice yields are projected to increase only slightly. Sorghum is the only major District crop that is expected to have a production decline, but this stemmed largely from reduced plantings because of pest issues and lower prices in 2015.

While the general outlook for the fall crops is strong, one contact has noted that some areas in the District have recently experienced flooding that may reduce yields and production by more than expectations. District coal production has continued to decline, as year-to-date production through August was down a dismal 26%.