Beige Book: State economy steady

Economic conditions are holding steady in Arkansas though some sectors, most notably tourism and entrylevel homebuying, are showing strong growth, the Federal Reserve Bank of St. Louis reported Wednesday in its latest Beige Book report of the regional economy.

Robust demand across the state is driving production for businesses while also increasing turnover as companies compete for workers, Nathan Jefferson, regional economist for the Fed, said Wednesday.

“This starts with strong consumer demand in Arkansas that’s put more pressure on businesses to increase output and so businesses are looking for workers more in Arkansas than in other parts of the district,” he added. “As businesses feel pressure to get workers, they’re experiencing wage pressure as well.”

At the same time, businesses are slowing wage increases as profit margins tighten.

“Arkansas has seen stronger wage pressure than other parts of the district,” Jefferson said. “The exact amount that businesses are able to increase wages by and the amount they are able pass prices by has been curbed a little bit over the past few months.”

Workers are still seeing wage increases, but they have slowed over the past year. It’s still a favorable job market for workers. “There’s a lot of competition for workers and workers are moving to get wage gains,” Jefferson said.

Employers in the state are experiencing higher turnover rates and struggling to hire and retain workers over the past few months.

“This is something we’ve heard from a lot of different

contacts,” Jefferson said. “It has been getting better but it remains an issue, particularly in Arkansas.”

Entry-level homebuying is pushing up as demand drops for higher- priced housing, which is more sensitive to interest rates that have been rising since early 2022.

“Especially in Arkansas, the demand for entry-level homes has remained pretty solid,” Jefferson said Wednesday. “Inventory is what remains tight.”

Overall, companies in the region are projecting lower price increases in 2023. About 63% of firms contacted by the Fed reported an ability to pass along price increases, down from 82% a year ago.

That varies by industry, however, with about only 4% of retailers saying they felt comfortable increasing consumer prices, falling 14% from last year. Businesses in the tourism sector — chiefly hotels — reported prices will rise a projected 5.2% this year, up substantially from 0.3% in 2022.

Arkansas tourism is particularly robust, according to Jefferson.

“We have heard from contacts in Arkansas that tourism has remained really strong even after their prices have increased … and they’re optimistic about the demand holding up,” Jefferson said. “Price increases are being driven by that strong demand.”

Smaller firms are having more difficulty passing along price increases, moving into survival mode and accepting smaller profits rather than pushing up prices that may scare off customers, the report noted.

“A lot of smaller firms have less pricing power; they’re not able to negotiate favorable deals with suppliers,” Jefferson said. “Their margins have always been a little tighter than a larger firm that has pricing power. They feel they don’t have room to increase prices without losing customers, and they can’t afford to lose the customers they have.”

The Fed found positive developments for manufacturers as international shipping prices “are almost down to pre-pandemic levels” with an ease in logistics and supplychain bottlenecks that have plagued the economy over the past three years, Jefferson said.

“Prices have fallen pretty rapidly over the past few months,” he said. “We’ve seen a lot of reports of [price] easing in regard to the supply chain and more optimism in that regard than over late last year.”

Inventory for auto dealers is increasing across the region and demand picked up as a result. Dealerships also projected that demand will drop as interest rates continue to rise.

The regional Beige Book report covers economic conditions in all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. The analysis offers insight into employment and wages, consumer spending, prices, manufacturing activity, real estate and construction and other economic sectors.