Beige Book report: Tight labor market affecting hiring, skilled workers hard to find

More than half of the employers surveyed in November across the St. Louis Fed’s Eighth District expect to increase hiring and wages over the new 12 months, but many are having difficulty finding highly skilled workers for professional jobs, according to the monthly Beige Book report released Wednesday (Nov. 30).

The November 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.

In the St. Louis district, anecdotal survey shows economic conditions across the regional economy have modestly improved from a month ago, highlighted by double-digit residential sales in both the Little Rock and Northwest Arkansas real estate markets.

Still, the highlight of the monthly Fed report was employer hearsay that tight labor market conditions are forcing businesses across the region to change their hiring plans due to an inability to find the right workers.

“Contacts cited growth of sales and a need for skills not possessed by their current staff as the top factors behind their hiring plans. Contacts cited an inability to find workers with the required skills as the top factor restraining hiring plans,” noted the St. Louis report. “The tight labor market has led to moderate growth in wages. Over half of contacts reported wages were higher or slightly higher than during the same period last year, and 60% reported increasing wages and salaries to attract or retain employees, particularly those in professional and technical, production, and administrative positions.”

The Beige Book survey follows two recent reports showing that the up-and-down U.S. economy may again be decelerating after strong consumer and government spending in the third quarter lifted GDP growth above 3% for the first time since fourth quarter of 2014. On Tuesday, the Bureau of Economic Analysis reported that the U.S. economy had expanded by 3.2% in the second quarter, up from the first estimate of 2.9% on Oct. 28, and a marked improvement over tepid growth of only 1.4% in the third quarter of 2015.

However, the Atlanta GDPNow on Wednesday lowered its fourth quarter GDP forecast to only 2.4%, down from a strong 3.6% annual growth rate on Nov. 23. At an economic briefing in Little Rock on Nov. 16, St. Louis Fed economist Kevin Kliesen said he expects the U.S. economy to only see 2% GDP growth annually over the next three years. The Fed economist, who also gathers anecdotal data for the regional Beige Book, said his internal projections see “unofficial” 2.5% GDP growth in the fourth quarter and about 2% for the second half of 2016.

Below are the Beige Book highlights of key sectors from the St. Louis District.
• Consumer Spending
Reports from general retailers, auto dealers, and the hospitality industry paint a mixed picture of consumer spending activity in the District. General retailers in Louisville and Memphis indicated a slowdown in general retail sales since the previous report. Multiple auto dealers across the District also reported a slowdown in sales, which some attributed to the uncertainty caused by the presidential election.

“Most dealers expect an increase in sales and inventory in the next quarter. In addition, several dealers also noted a shift in demand toward used vehicles,” the report said. “Contacts in the hospitality industry in East Arkansas continued to report favorable occupancy rates.”

• Manufacturing and Other Business Activity
Manufacturing activity increased modestly since the previous report. The majority of contacts reported that production and capacity utilization increased in the fourth quarter relative to one year ago and new orders were about the same or higher. Several companies reported capital expenditure and facility expansion plans in the District, including firms that manufacture transportation equipment, machinery, and fabricated metal products.

In the steel industry, contacts reported that increased demand from the automotive sector has partially offset the decline in demand from the energy sector, but that oversupply remains a concern. Nearly all contacts surveyed expect production, new orders, and capacity utilization to increase in the first quarter of 2017 relative to the first quarter of 2016.

Reports from retail services were mixed, with restaurant and grocery store closings and openings reported across the District. Reports from the transportation sector were positive. A Memphis contact reported revenues are up, and Little Rock contacts reported shipment increases have outperforming seasonal highs.

• Real Estate and Construction
Residential real estate activity has been relatively flat since the previous report. Seasonally adjusted home sales declined marginally in Louisville, Memphis, and St. Louis from September to October but ticked up in Little Rock. Year-to-date home sales remained strong in all four MSAs, increasing by 10% in Little Rock, 7% in Louisville, 8% in Memphis, and 5% in St. Louis compared with the same time last year. Most real estate contacts reported fourth-quarter demand for single-family homes has remained flat, but more than half expect demand to increase slightly in the first quarter of 2017. Residential construction has strengthened moderately since our previous report.

Commercial real estate activity has improved modestly since the previous report. Most survey respondents reported that demand for office and retail properties was about the same or slightly higher than a year ago, while a slim majority indicated that demand for industrial properties has been slightly higher. These trends are expected to continue in the coming months.

Commercial construction activity increased modestly, as a majority of local construction contacts indicated an increase in demand for office and retail properties so far in the fourth quarter; they also expect demand to carry into the first quarter. Reports on speculative construction projects were mixed. Many local real estate contacts reported no changes in the level of speculative building.

• Banking and Finance
A survey of District banks indicates growth in loan demand during the current quarter with some signs of slowing demand in the first quarter of 2017. District bankers reported that demand for mortgages and commercial and industrial loans has been strong during the fourth quarter. Contacts expect strong demand for commercial and industrial loans to continue into 2017; however, there was an uptick in the number of bankers expecting the demand for mortgages to slow slightly in early 2017. Creditworthiness of applicants was slightly lower for agricultural loans and unchanged for all other loan categories.

• Agriculture and Natural Resources
Forecasted corn and rice production are now slightly lower than projected in September. Meanwhile, cotton and soybean production forecasts are up slightly. Overall, contacts believe production levels will not provide any relief from the environment of low crop prices, which means farmer solvency issues will only worsen heading into the next crop year.

Year-to-date coal production through October is down 20% from one year ago. However, October coal production is up 10% from the September level and slightly higher than one year ago. Contacts noted that the outlook has improved modestly in recent weeks; however, the supply and low price of natural gas continues to temper long-run growth prospects.