Beige Book: Regional economy continues modest expansion, labor market still growing

More than half of the employers across the St. Louis Fed’s Eighth District expect economic conditions to be better or somewhat better than last year as modest employee growth and improved wages continue to lift the regional economy, according to the Beige Book report released Wednesday (May 31).

The May 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.

Today’s Beige Report was release only days after Bullard’s recent lecture at Keio University in Tokyo where the Fed chief said U.S. microeconomic data has been “relatively weak” since the March Federal Open Market Committee (FOMC) meeting where banking chiefs raised the federal funds rates to a target range of 0.75% to 1%.

Bullard also said U.S. real GDP growth has stalled over the past seven quarters and is not likely to improve beyond current levels for the remainder of 2017.

“Tracking estimates for second-quarter real GDP growth suggest some improvement from the first quarter, but not enough to move the U.S. economy away from a regime characterized by 2% trend growth,” Bullard said.

On Friday, the U.S. Bureau of Economic Analysis reported that U.S. real GDP grew at a weak annual rate of 1.2% in the first quarter, based on the group’s “second estimate.” That revision, however, is still higher than the advance GDP estimate release more than a month ago. The Atlanta Fed’s GDPNow is forecasting robust real GDP growth of 3.8% in the second quarter.

ST. LOUIS DISTRICT CONDITIONS
In the St. Louis district, economic conditions have continued to expand at a modest from a month ago, highlight by anecdotal reports from retail contacts that paint a mixed picture on consumer spending and signs of weakening auto sales but positive reports from non-auto contacts.

In general, business contacts surveyed in mid-May continued to hold an optimistic outlook for growth in 2017. On net, 55% of contacts expect District economic conditions in 2017 to be better or somewhat better than last year. This outlook was generally unchanged since contacts were surveyed in mid-February. Following are the Beige Book highlights of key sectors from the St. Louis District.

Consumer Spending
Reports from general retailers, auto dealers and hoteliers portray a mixed picture of consumer spending activity. General retailers reported moderate sales growth, although contacts in Arkansas and Missouri reported year-over-year declines in April sales tax collection. Sixty -three percent of surveyed auto dealers reported a reduction in year-over-year sales halfway through the second quarter. On net, 50% expect this negative growth to continue into the next quarter. Hospitality contacts in St. Louis and Louisville indicated a modest increase in business activity after a slow first quarter.

Employment and Wages
Employment has increased modestly since the previous report. Of the business contacts surveyed in mid-May, on net, 31% reported that second-quarter employment was higher or slightly higher than a year ago and 40% expect third-quarter employment to be higher or slightly higher than a year ago. Contacts continued to report difficulties finding skilled or motivated employees.

Contacts reported moderate wage growth since the previous report. On net, 61% of contacts reported wages and labor costs were higher or slightly higher than a year ago. Contacts in construction, manufacturing, and banking reported increasing wages to retain and attract employees. Depressed agriculture prices have kept wage increases to a minimum in eastern Arkansas.

Manufacturing Activity
Manufacturing activity has increased at a moderate pace since the previous report.

“Several companies across a broad range of industries reported capital expenditure and facility expansion plans, including firms that manufacture textiles, nonmetallic mineral products, transportation equipment, and food products,” the report said.

In a recent survey, contacts reported continued improvement in manufacturing conditions. The majority reported that production, new orders, and capacity utilization increased in the second quarter relative to one year ago. The results are generally unchanged from our previous survey in mid-February. Contacts were generally optimistic about the third quarter, with 65%, on net, expecting further growth in production, new orders, and capacity utilization. Despite the optimistic outlook, some contacts expressed concerns about regulatory uncertainty and the difficulty of finding employees.

Nonfinancial Services
Reports from the service sector have been positive since the previous report. More than two-thirds of transportation and service contacts reported that sales met or exceeded expectations in the current quarter. On net, 25% of contacts expect sales to be higher in the next quarter than they were at that time last year.

Firms that provide transportation, utility, and information technology services reported plans to expand facilities and hire employees. Reports from healthcare firms remain mixed. One major hospital announced layoffs in the Louisville area, citing uncertainty around healthcare reform and low patient volumes. Another healthcare provider cited high costs as a reason for lower-than-expected sales over the past quarter. Other healthcare providers in Louisville and Memphis announced expansions.

Real Estate and Construction
Residential real estate activity has declined modestly since the previous report. Home sales remained flat or decreased in the District’s largest metro areas. Several contacts reported that significant shortages in inventory have hindered sales, particularly in Louisville, as single family demand has continued to be strong. Local inventory levels are mostly expected to decline further in the coming months. Some contacts noted a beneficial impact from a slight decrease in mortgage rates. Residential construction improved modestly since the previous report. On net, 40% of contacts reported a slight increase in residential construction relative to the same time last year and about the same fraction expect this trend to continue through the third quarter.

Commercial real estate activity has also improved modestly since the previous report. Contacts continued to indicate an increase in demand for both office and industrial properties compared with the same time last year. Most contacts reported no change or a slight increase in multifamily property demand and no change or a slight decrease in retail property demand. Commercial construction activity remained robust, highlighted by an increase in multifamily and industrial building.

Banking and Finance
Banking conditions continued to strengthen at a moderate pace, driven primarily by strong growth in demand for business and mortgage loans. Demand for auto loans was flat over the period and is expected to remain level over the coming quarter, while overall loan demand is expected to grow at a moderate rate. The creditworthiness of applicants for agriculture loans worsened for a third straight quarter; credit standards for agricultural lending increased relative to a year ago and are expected to continue tightening in the near term.

Agriculture and Natural Resources
Agriculture conditions deteriorated significantly due to flooding across the District. Mid-May percentages of corn and rice crops rated fair or better were down or unchanged from a year ago in every state for which data were reported. Flooding and rain also slowed planting, with planned acreage planted for corn, cotton, rice, and soybeans each below the percentages of the previous year. Cotton was the farthest off last year’s planting pace.

Natural resource extraction conditions improved modestly from the previous report and year. Seasonally adjusted coal production growth was up slightly from March to April, and April production was also 14% above last year’s level.