St. Louis: May 2023 | Federal Reserve Bank of Minneapolis (2023)

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May 31, 2023

Summary of Financial Activities
Economic conditions have remained unchanged since our last report. Contacts continued to report difficulties in recruiting workers, but it was generally easier to find and retain workers. Modest increases in wages and other input costs led to margin compression as companies were unable to pass on these cost increases as selling prices. Consumer spending was mixed, with some businesses saying they had lowered expectations due to weaker overall economic conditions, while others were unable to meet strong demand due to labor shortages and supply chain issues. The residential real estate sector was largely unchanged, but contacts in commercial real estate reported weak sales and concerns about debt problems and looming vacancies. Banking sources report weak demand for loans and delinquency rates continue to rise. Overall, the outlook softened slightly amid worries about future demand and broader concerns about weaker macroeconomic conditions in the second half of the year.

labor market
Employment has improved slightly since our last report. Unemployment has been low and recruiting and retaining workers remains a challenge in several industries. In the most recent report, however, more contacts mentioned the ability to hire and retain workers to meet demand. A health care contact in Louisville said the job market had improved to the point where only low-wage jobs remained, and a startup in St. Louis said they were able to hire new talent faster than a year ago.

Wages are up slightly since our last report. Most contacts reported an overall net increase in payroll costs. Agriculture contacts in Memphis reported that wages continued to rise, and financial services contacts in St. Louis increased worker wages and overall labor costs.

price
Prices have increased slightly since our last report. Half of regional respondents said prices had increased or increased slightly since the first quarter, 31% said prices were the same and 19% said prices had decreased or decreased slightly. These responses appeared to be driven by rising input costs, with more than three-quarters of respondents reporting higher or slightly higher non-labor costs and the same percentage reporting higher or slightly higher labor costs. Almost half of respondents expect prices to be higher in the third quarter compared to the same period last year. Respondents reported that consumers are becoming more price sensitive, which prevents businesses from fully passing on rising costs to consumers. An auto industry contact said industry-wide wage pressures, higher interest rates and rising inventories have squeezed profit margins. A retail industry contact said demand has weakened due to higher prices, driving down prices and squeezing margins.

expenses
General retailers, auto dealers and hotel contacts reported mixed business activity, with a slightly weaker outlook. Kentucky, Missouri and Arkansas actually collected more sales tax in April compared to March, while West Tennessee saw a decrease. Retailers in Memphis said business was in line with their expectations, however, their expectations for future business were lower due to increased economic uncertainty due to rising interest rates and the looming debt ceiling decision. A St. Louis auto dealer reported relatively flat business compared to last month, noting that they had lowered their expectations for upcoming sales because they didn't have enough product to meet demand. Little Rock restaurants damaged by tornadoes in late March are preparing to reopen. Economic activity related to the Kentucky Derby is up more than 10 percent from a year ago, according to sources, who estimate the event has surpassed pre-pandemic numbers.

manufacturing
Overall, manufacturing activity has picked up slightly since our last report. Businesses reported a modest increase in new orders, while output rose modestly in Missouri and fell modestly in Arkansas. Average hours worked increased and wages increased more than 5% compared to last year. Contacts reported that employee retention also remained an ongoing problem. Overall, companies expected modest gains in productivity, capacity utilization and new orders, but some were concerned about weaker demand.

non-financial services
Activity in the non-financial services sector has remained steady since our last report. Air traffic was steady and a transportation contact in the St. Louis area reported that their customers were scrambling to replenish dwindling inventory, leading to increased demand for transportation and logistics services. Contacts in the transport sector reported delays in capital investment projects due to rising labor and input costs. Healthcare Contacts said the situation worsened due to higher input costs and lower than expected sales.

Investments in education and workforce development by nonprofit and for-profit businesses increased across the region. In the St. Louis area, an energy company invested in a summer program for high school students, providing them with training they hope will return as full-time workers in the future. In the Little Rock area, the university received funding from local businesses to invest in manufacturing, engineering, automation, process design, and technology projects, and a nonprofit education and community center began offering classes, transportation, and child care. school leaving certificate and receive professional services.

real estate and construction
The residential real estate market has been steady since our last report. Residential rental rates rose slightly. New residential listings in Louisville are down significantly since our last report, while new listings in the Memphis and Little Rock areas have remained steady. Seasonally adjusted home sales have remained flat since our last report. Real estate contacts said sales in recent months have met expectations.

Commercial real estate slowed slightly since our last report. A commercial real estate contact raised concerns about “shadow vacancies”: offices that are still rented due to long leases but are not actually being used due to remote working. The source expressed concern that most of the leases for these office spaces will not be renewed. Labor shortages are the biggest concern among construction industry contacts, followed by slowing demand for new projects. Most construction and commercial real estate contacts reported lower than expected sales.

banking and finance
Banking conditions in the region remained unchanged since our last report. The contacts surveyed reported lower overall loan demand across all loan types in recent months. The contact expects further weakening of loan demand next quarter, noting a recent increase in the use of consumer credit, especially for everyday purchases, due to rising prices. At the same time, high interest rates have limited demand for business credit. Contacts reported that customers were taking funds from their portfolios to pay off loans and avoid new loans. Credit standards were largely unchanged from the previous quarter, but delinquency rates rose slightly, continuing the slow upward trend of recent quarters.

Agriculture and Natural Resources
The overall picture remains unchanged, although the outlook has weakened slightly since our last report. Most of the farm contacts surveyed reported that their costs, including labor, had increased, leading to a slightly worse outlook. The percentage planted in row crops has increased, as expected, since the last reporting period and is up slightly from this time in 2022. Acreage progress is mixed across the region: some states, such as Missouri and Illinois , have improved significantly in recent years, while other states in the region have seen slightly worse conditions.