Full text of Eighth District Beige Book : February 2023

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal Reserve Bank of

St. Louis
The Beige Book ■ February 2023

Summary of Economic Activity
Economic conditions have remained unchanged since our previous report. Employers continue to report tight labor
markets, although the pace of wage growth has slowed. Contacts reported slowing price increases and plans to accept
tighter profit margins in order to maintain prices. Consumer spending was mixed, with reports of continued price sensitivity but demand slightly outstripping expectations. The real estate sector saw rent growth flatten and homebuying
demand slow, but demand for industrial and retail space rose. Manufacturing growth declined, and lending conditions
remained stable. The overall outlook rose slightly thanks to expected improvements in input prices, labor costs, and
demand.

Labor Markets

Prices

Employment remains unchanged since our previous
report, with contacts reporting tight labor markets but
varying turnover rates. Several contacts reported challenges in hiring enough workers to meet demand, but an
increased share reported more success in retaining
employees. A restaurant contact in Memphis estimated
60% of restaurants in the area are understaffed and 80%
have reported difficulty filling jobs. A logistics contact in
Little Rock saw more rotation in and out of the company,
while an employment contact in Memphis reported that
more clients are staying at their current jobs. An agriculture contact reported a sharp increase in the number of
firms using temporary visa worker programs for the first
time.

Prices have increased modestly since our previous
report. Overall, contacts reported slowing price increases
and projected lower rates of price growth in the year
ahead. This year, 63% of respondents reported an ability
to pass on costs, down from 82% a year ago. Some
industries expect to see the pace of price increases slow
more than others, with retail respondents projecting a
4% increase this year, compared with 14% a year ago.
However, some industries expect to see prices increase
by more than the previous year, with tourism respondents projecting increased prices of 5.2% this year, compared with 0.3% a year ago. A contact in the hotel industry estimated they would pass on 60-70% of costs to
consumers. A contact in the automobile sales industry
reported that increased inventory levels led to more
competitive market pricing, keeping prices lower. Firms,
especially smaller ones, reported accepting tighter profit
margins instead of increasing prices.

Wages have grown slightly since our previous report. In
contrast with the past few reports, contacts have reported minimal increases in wages. A healthcare contact in
Louisville reported labor costs have been lowering reimbursements and pushing profit margins to just above
break-even, while a retail contact in St. Louis has not
been able to pass labor costs on to customers, which
threatens the viability of their business. A construction
contact in St. Louis reported that higher labor costs
coupled with declining demand have placed a strain on
the company.

Consumer Spending
District general retailers, auto dealers, and hospitality
contacts reported mixed business activity and a mixed
outlook. January real sales tax collections increased in
Kentucky, Missouri, and Arkansas relative to December
and decreased in West Tennessee. Retailers in St. Louis
noted generally lower business activity due to customers

H-1

Federal Reserve Bank of St. Louis
cutting back on spending because of higher prices.
District auto dealers reported generally steady business
activity due to increased inventory, though they expected
business activity may slow in the upcoming months due
to higher interest rates. An auto dealer in Louisville reported they have been seeing new vehicle sales rates
slowing. A restaurant in Memphis noted that demand
continues to be steady even with food costs surging.
District hospitality contacts noted that business activity
was generally mixed, with demand moderated by rising
costs.

are staying in their current rentals. Residential real estate inventory has continued to increase since the previous report, as homebuyer demand slows. Some real
estate contacts reported signs of increased demand in
recent weeks due to some relative stabilization in mortgage rates.
The commercial real estate sector has been mixed.
Office demand remains low, but industrial demand remains high despite increased rents. Retail real estate
has improved since the previous report, and one contact
reported retail projects are back in demand for the first
time since before the pandemic. Construction demand
has slowed, with contacts reporting that many projects
are on hold as investors wait out market uncertainty
about rate hikes. One St. Louis contact reported increased construction activity as interest rates flattened.

Manufacturing
Manufacturing activity growth has modestly declined
since our previous report. Firms have reported modest
decreases in new orders and production. Contacts reported that international shipping costs are returning to
their pre-pandemic levels. Similarly, prices for raw materials are falling but have yet to return to pre-pandemic
levels. The labor market for manufacturing remains tight
as firms look to hire more workers. On average, firms
reported they expect slight increases in production,
capacity utilization, and new orders in the coming quarter.

Banking and Finance
Banking conditions in the District remain stable since our
previous report. Overall loan demand remains largely
unchanged from the past quarter. Commercial and industrial loan demand saw a small decline, while demand
for mortgage loans moderately increased with the dip in
the 30-year fixed mortgage rate. Despite this recent
growth, Memphis banking contacts expect mortgage
lending to slow down in the coming month. Contacts also
expect margins on interest-bearing deposits to contract
as federal funds rate increases ease up and the resulting
pressure from competition requires banks to pay higher
interest rates. Credit and asset quality remain strong,
and delinquency rates showed no significant change
from the past quarter.

Nonfinancial Services
Activity in the nonfinancial services sector has remained
stable since our previous report. Air freight and passenger traffic has remained stable, but trucking services in
the Memphis and St. Louis areas reported decreased
pay per load, increased fuel costs, and parts shortages.
In the Louisville area, investment in infrastructure
sparked investment opportunities in freight transportation. A Memphis-area wedding planner reported a decline in spending on 2023 weddings, noting that couples
are choosing less expensive options and spending wedding funds on honeymoons and house purchases instead.

Agriculture and Natural Resources
District agriculture conditions have declined moderately
since our previous report. The number of acres of winter
wheat planted in the District this season has increased
by 27% compared with this period a year ago. These
increases range from 15-55% across District states with
the lone exception of Arkansas, which saw a moderate
decrease of 14%. District contacts are no longer optimistic on the outlook for the rest of the year, due to concern
about the increased cost of inputs, especially labor.
Additionally, contacts noted sales were either at or below
expectations, and some contacts expressed concern that
higher interest rates were putting additional strain on
their balance sheets.

Nonprofit firms that provide housing experienced steady
funding and scaled up construction in the Memphis area.
In the St. Louis area, nonprofit contacts in arts and public
policy faced competition for volunteer labor. Rural
healthcare in the Memphis area continued to face funding challenges and reduced the number of services and
beds in response. While education contacts in the Louisville area reported depressed university enrollment,
enrollment in community college increased due to new
programs that reduced tuition costs.

Natural resource extraction conditions increased moderately from December to January, with seasonally adjusted coal production rising just under 10%. However,
January production decreased moderately by 11% compared with the previous year. ■

Real Estate and Construction
Residential real estate rental rates have continued to
stagnate since our previous report. Multiple residential
real estate contacts reported that the rate increases of
the past year are being met by resistance and families

H-2