Federal Reserve Bank of St. Louis
Summary of Economic Activity
Economic activity in the Eighth District has modestly increased since our previous report. Employment was unchanged and wage growth remained moderate. Prices have risen at a robust pace and increases were widespread. Consumer spending reports were mixed, and banking conditions were largely unchanged. Nonfinancial services and manufacturing activity modestly increased overall, with the latter mainly driven by increasing demand in national defense and data center construction. The outlook has slightly improved, although uncertainty, supply chain disruptions, and elevated fuel costs associated with the conflict in the Middle East continue to weigh on the outlook.
Labor Markets
Employment levels overall have remained unchanged since our previous report. Construction firms in Memphis saw no notable changes in staffing. A staffing company in Kentucky observed that manufacturers were hiring in a "yo-yo pattern," frequently pausing and restarting their hiring efforts. In Louisville, a restaurant reported reduced employee hours and lower demand for labor because of fewer customers. Conversely, a professional services firm in St. Louis maintained steady hiring, supported by a robust backlog of contracts. Recent District survey results indicate that contacts expect to expand their workforce in the coming months.
Wage growth has been moderate, averaging about 3 percent annually, according to our recent survey. Most contacts expect wages to continue to rise at a similar pace in the coming months. Contacts cited rising costs of living, higher minimum wages, and unions as factors putting upward pressure on wages. A Kentucky manufacturer reported that turnover of hourly workers is beginning to increase, as workers are leaving for slightly higher wages elsewhere.
Prices
Prices have risen at a robust pace since our previous report. Rising nonlabor costs remained widespread, with suppliers frequently adjusting prices and adding temporary fees, surcharges, or other extra charges to invoices. A manufacturer in St. Louis noted broad cost pressures across all inputs, while a construction firm in Little Rock reported higher costs for insurance, utilities, building materials, and contracted services. A transportation firm described goods and services costs as "out of control," putting stress on operations. Agriculture contacts observed steady price increases for nitrogen, sulfur, and phosphorus and anticipate record-high input costs for 2027. Businesses reported passing these higher costs onto customers whenever possible. For example, a wholesaler has fully passed along a 4 percent supplier price increase to its customers. Conversely, a restaurant owner said frequent price hikes have prompted negative reactions from patrons, limiting pricing flexibility. Overall, contacts expect to raise prices charged to customers by an average of 3 percent over the next year.
Consumer Spending
Consumer spending reports have been mixed. Several retailers reported increased dollar sales but attributed most of this growth to higher prices rather than increased sales volume. An automotive dealer in Memphis noted a modest seasonal increase in new vehicle purchases and trade-ins. A dealer in Central Kentucky reported a significant rise in vehicle inventory over recent months, which has prompted more aggressive competition among dealers. Travel and tourism reports were also mixed. For example, a District airport contact reported that air travel demand rose year-over-year, though the pace of growth slowed each month. Tourism spending reports from Louisville indicated strong activity, while a boutique hotel and restaurant in Mississippi experienced soft summer demand, with slight improvements in bookings for August and September. An entertainment venue in Missouri reported a slight uptick in activity, while a leisure-related firm in Illinois observed a 20 percent decline in July sales, which have since rebounded.
Manufacturing
Manufacturing activity overall has increased modestly. Reports varied across product types: Firms producing appliances and food products experienced lower sales than expected while industrial manufacturers in energy and defense sectors reported strong demand, resulting in robust growth in new orders and capacity utilization. A Tennessee manufacturer noted weaker demand from major home improvement retailers due to fewer home improvement projects and low housing turnover. An industrial machinery manufacturer in Missouri reported a record backlog of orders that continues to grow, forcing increased outsourcing to meet delivery schedules. Contacts expect manufacturing activity to further expand in the upcoming months.
Nonfinancial Services
Activity in the nonfinancial services sector has increased modestly since our previous report. While professional services reports were mixed, firms specializing in Information Technology (IT) experienced robust demand. For example, an IT services firm in Northwest Arkansas expanded its offerings to include AI training and client enablement. A professional services operator focused on data centers in Kentucky and Indiana reported rising demand for transmission infrastructure upgrades. Transportation and logistics activity increased moderately. In Kentucky, a logistics contact noted strong coal exports driven by global consumption, while a Tennessee transportation firm attributed their solid demand to stronger economic growth and reduced industry capacity. Nonprofits reported worsening conditions in recent months, with corporate donations dropping sharply over the past six months.
Real Estate and Construction
Residential real estate activity has declined slightly. A contact in Western Tennessee described the housing market as transitioning from stable to slow, with inventories increasing and homes remaining on the market for longer periods. A Missouri residential real estate firm reported that high mortgage rates, rising homeowner insurance costs, and significant inflation are all contributing to weaker housing demand. Across the District, some contacts noted that higher-priced homes are seeing less movement compared with lower-priced and moderately priced homes. In general, contacts expect that elevated mortgage rates and home prices will continue to limit housing demand into early 2027.
Commercial real estate activity remains solid but is showing signs of slowing. A Memphis contact reported that industrial activity is steady but weakening slightly. In St. Louis, a developer said retail demand is still strong; while in Little Rock, demand is stable but vacancy rates are gradually rising. Construction activity is slowing outside of data centers. An Arkansas economic developer noted that rising commercial and residential development costs are constraining new construction activity, while a construction firm in Missouri attributed the slowdown to labor shortages and overall inflation.
Banking and Finance
Banking activity has remained mostly unchanged since our previous report. Loan demand was strong, with several banks reporting solid commercial and industrial lending activity. Asset quality remains positive overall with low delinquency levels, but multiple bankers observed rising delinquencies and slow payments among households and small businesses. Credit standards were generally steady but showed pockets of tightening, particularly where funding pressures increased or credit quality weakened. Deposit competition remained elevated.
Agriculture and Natural Resources
Agriculture conditions remain stressed but have slightly improved since our previous report. A contact in Northwest Mississippi noted that the corn harvest produced good yields, while the outlook for cotton and soybeans hinges on the impact of recent heatwaves. According to a Mississippi farm equipment supplier, sales of new machinery are still weak, but farmer sentiment has improved, driven by higher crop prices and additional government support. In Arkansas, a rice processor observed decreased rice demand due to increased imports, whereas a soy processor reported continuous crushing and refining operations fueled by strong demand. Poultry demand continues to climb as consumers opt for more affordable protein sources; however, profit margins are being squeezed by rising input costs. An Arkansas poultry farmer shared that they were expanding capacity.
For more information about District economic conditions visit: https://www.stlouisfed.org/research/regional-economy.