Beige Book report shows U.S., regional job markets are tightening, with good workers hard to find

Anecdotal reports from the Federal Reserve’s Beige Book report on the Eighth District show that local labor markets are tightening as employers are reporting difficulties in finding skilled or qualified candidates to fill job vacancies.

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

The regional report for the St. Louis District largely mirrors what is taking place in the other 11 districts, the Federal Reserve said, suggesting that national economic activity continued to expand at a modest pace on balance during the reporting period of July through late August.

“Most Districts reported a ‘modest’ or ‘moderate’ pace of overall growth. However, Kansas City and New York reported no change in activity, and Philadelphia and Richmond noted that, while still expanding, activity slowed from the previous period,” the Federal Reserve said. “Contacts across the twelve Districts generally expect moderate economic growth in coming months.”

The Beige Book report dovetails with other recent economic reports showing the U.S. economy is steadily expanding, but not at fast enough to cause the Federal Reserve to boost interest raise or signal to consumers that the Great Recession is well behind them.

In late August, the Bureau of Economic Analysis reported that real gross domestic product (GDP) crept forward at an annual rate of 1.1% in the second quarter with corporate profits well off the first three months of 2016. The disappointing GDP report came just hours ahead of Federal Reserve Chair Janet Yellen’s market opening speech where she made a case for raising interest rates in the near term, although not offering a specific timetable.

Last week, the U.S. Bureau of Labor Statistics reported that nonfarm payroll employment increased by 151,000 in August, and the nation’s jobless rate remained unchanged at 4.9% before heading into the Labor Day weekend. Labor Department Secretary Thomas Perez said the August employment report shows that U.S. economy is in “a steady recovery.”

“Thanks to the grit and determination of American workers, the economy added 151,000 jobs in August,” Perez said. “With this report, the private sector has added 15.1 million jobs since February 2010, and we are in the middle of the longest streak of overall job growth on record.”

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

• Employment, wages, and prices
Among businesses surveyed during mid-August, 60% reported nominal wages were higher relative to the same time last year and 30% reported employment was higher or slightly higher. Contacts in manufacturing, construction, and wholesale trade continued to report difficulties in finding skilled or qualified candidates to fill job vacancies, citing either a shortage of applicants or candidates lacking the necessary skills.

Almost half of contacts reported that non-labor input prices were higher or slightly higher than one year ago. However, contacts reported limited movement on selling prices, as only 20 percent reported prices charged to customers were higher or slightly higher than one year ago.

• Consumer spending
Reports from general retailers and auto dealers paint a mixed picture of consumer spending activity in the District. Contacts in the restaurant and hospitality industry in Memphis reported that business continues to be strong, though contacts in Little Rock and eastern Arkansas indicated a slowdown in general retail sales since the previous report.

• Manufacturing and other business activity
Manufacturing activity has been mixed since the previous report. In a recent survey of manufacturers, roughly one-third reported that production, new orders, and capacity utilization increased in the third quarter relative to one year ago, while one-third reported no change and one-third reported a decrease. Several companies reported capital expenditure and facility expansion plans in the District, particularly among firms that manufacture transportation equipment and industrial machinery.

However, reports from manufacturers of primary and fabricated metal products were generally weak. Two manufacturers of metal pipes for the oil and gas industry announced layoffs and cutbacks in production, and a manufacturer of mining equipment components reported that demand was weaker than expected.

• Real estate and construction
Residential real estate activity has weakened slightly since the previous report but has remained strong overall. Compared with a year ago, July home sales decreased across all four major MSAs, declining by 9% in St. Louis, 5% in Louisville, 4% in Memphis and less than 1%in Little Rock.

Despite this slowdown, year-to-date sales are higher than one year ago and most real estate contacts reported that recent sales have met expectations. Some contacts noted that some of the sales shortfall was due to a lack of inventory, and approximately two-thirds of contacts indicated that inventory was slightly lower than a year ago. Residential construction activity continued to improve. Most residential real estate contacts reported that new construction was moderately higher than a year ago.

Local commercial real estate contacts indicated that demand was either about the same or slightly higher than a year ago for most property types. Several commercial real estate contacts reported an increase in speculative industrial space, but many others reported little change in speculative building activity of other property types.

• Banking and finance
A survey of District banks indicates strengthening loan demand, and credit conditions have remained stable. Demand for mortgages and credit cards remained strong, especially in the St. Louis area. Bankers reported demand for mortgages has consistently increased since the start of 2016.

However, creditworthiness of applicants was slightly lower for commercial and industrial loans and largely unchanged for all other loan categories. Delinquencies fell or remained stable across the District for all loan categories.

• Agriculture and natural resources
While the quick return to low crop prices has weakened the near-term outlook for farm income, crop conditions bode well for strong yields. The proportions of corn, cotton, rice, and soybeans rated fair or better were roughly the same as in our previous report, but the proportion of crops rated excellent increased. Multiple contacts noted that expected strong yields, both in the District and elsewhere, are likely playing a role in the return of low prices.

The sharp downward trend continues for coal production, with July production down 18% from a year ago, and year-to-date production down 27%.