stylesheet_pack_tag not finding app/javascript/src/application.css in rails 5.1 with webpacker gem

I am receiving this error when I try to load a page in my new rails 5.1 app using webpacker. I would like webpacker to handle CSS as well.

Started GET "/" for ::1 at 2017-09-01 12:20:23 -0400
Processing by HomeController#welcome as HTML
  Rendering home/welcome.html.erb within layouts/application
  Rendered home/welcome.html.erb within layouts/application (0.4ms)
Completed 500 Internal Server Error in 28ms

ActionView::Template::Error (Webpacker can't find application.css in /Users/myusername/Documents/testing-ground/myapp/public/packs/manifest.json. Possible causes:
1. You want to set wepbacker.yml value of compile to true for your environment
   unless you are using the `webpack -w` or the webpack-dev-server.
2. Webpack has not yet re-run to reflect updates.
3. You have misconfigured Webpacker's config/webpacker.yml file.
4. Your Webpack configuration is not creating a manifest.
Your manifest contains:
  "application.js": "/packs/application-1ba6db9cf5c0fb48c785.js",
  "hello_react.js": "/packs/hello_react-812cbb4d606734bec7a9.js"
     7:     <%= stylesheet_link_tag    'application', media: 'all', 'data-turbolinks-track': 'reload' %>
     8:     <%= javascript_include_tag 'application', 'data-turbolinks-track': 'reload' %>
     9:     <%= javascript_pack_tag 'application' %>
    10: <%= stylesheet_pack_tag 'application' %>
    11:   </head>
    13:   <body>

app/views/layouts/application.html.erb:10:in `_app_views_layouts_application_html_erb__1178607493020013329_70339213085820'

I am running the ./bin/webpack-dev-server alongside the rails server. I created the app using:

rails new myapp –webpack
bundle exec rails webpacker:install:react

I have a single CSS file app/javascript/src/application.css. (Writing that makes me feel something is wrong. Putting css inside of a javascript directory seems improper.)

I just have single root route defined root to: ‘home#welcome’.

Here is app/views/layouts/application.html.erb

<!DOCTYPE html>
    <%= csrf_meta_tags %>

    <%= javascript_pack_tag 'application' %>
    <%= stylesheet_pack_tag 'application' %>

    <%= yield %>

Here is my config/webpacker.yml (I have tried also setting compile to false in development.

# Note: You must restart bin/webpack-dev-server for changes to take effect

default: &default
  source_path: app/javascript
  source_entry_path: packs
  public_output_path: packs
  cache_path: tmp/cache/webpacker

  # Additional paths webpack should lookup modules
  # ['app/assets', 'engine/foo/app/assets']
  resolved_paths: []

  # Reload manifest.json on all requests so we reload latest compiled packs
  cache_manifest: false

    - .coffee
    - .erb
    - .js
    - .jsx
    - .ts
    - .vue
    - .sass
    - .scss
    - .css
    - .png
    - .svg
    - .gif
    - .jpeg
    - .jpg

  <<: *default
  compile: true

    host: localhost
    port: 3035
    hmr: false
    https: false

  <<: *default
  compile: true

  # Compile test packs to a separate directory
  public_output_path: packs-test

  <<: *default

  # Production demands on precompilation of packs prior to booting for performance.
  compile: false

  # Cache manifest.json for performance
  cache_manifest: true

I don’t want to add too many details up-front incase they are more distracting then helpful. Please ask for anything else and I’ll add to my question. Thanks!