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The Eighth District's economy has expanded since our previous survey. The services sector continued to grow. Retail and auto sales increased in July and August over year-earlier levels. Home sales continued to increase and commercial real estate markets gained strength. Reports in manufacturing, however, were mixed. Several contacts reported plans to expand operations and hire new workers, while some other contacts reported plans to close plants and lay off employees. Commercial lending activity at a sample of District banks increased slightly in the past three months.
Consumer Spending
Contacts reported that, on average, retail sales in July and August were up over year-earlier levels. While 35 percent of the retailers surveyed noted that sales levels met their expectations, 43 percent reported that sales were below what they had anticipated, and 22 percent reported sales above expectations. Summer seasonal items, back-to-school items, children's clothing, and shoes were all strong sellers, while women's apparel moved more slowly. Approximately 69 percent of the contacts noted that inventories were at desired levels, while 27 percent reported that inventories were too high. Retailers appear generally optimistic about sales over the next two months.
Car dealers reported that, on average, sales in July and August were up over year-earlier levels. About 74 percent of the car dealers surveyed reported increases in sales, while another 17 percent reported no change. Many contacts attributed increased sales to the price discounts on new cars; about 68 percent of the respondents reported declines in sales prices, while 26 percent reported no change. About 45 percent of the car dealers noted that new car sales had increased relative to used car sales. About 18 percent reported an increase in low-end vehicle sales relative to high-end vehicle sales; 14 percent reported the opposite; and about 68 percent reported no change. Approximately 90 percent of the respondents reported no change in the acceptance rates of finance applications. Just over one-half of the car dealers surveyed reported that their inventories were at desired levels, while 43 percent reported that their inventories were too low. Nearly 48 percent of the car dealers surveyed expect increased sales over 2004 for the next two months.
Manufacturing and Other Business Activity
Reports from contacts in the manufacturing sector in the period since our previous survey were mixed. Several manufacturers reported plans to hire additional workers, expand operations, increase capital spending, and add new space, while a similar number of firms reported plans to reduce workforces and close production facilities. Contacts in the electronic product, primary metal, nonmetallic mineral, and medical supplies industries announced plans to expand operations, increase capital spending, and add new space in the District. Other firms in the rubber product and miscellaneous manufacturing industries reported plans to hire additional workers. Despite this growth, several other contacts in the pharmaceutical, food, and wood product industries reported plans to close plants or lay off workers. Several contacts in the Eighth District's auto parts and motor vehicle industries experienced net declines in economic activity since our previous report. Several manufacturers expressed concern over margin pressures because of the rising cost of fuel.
The District's service sector continued to expand in most areas since our previous report. Firms in the printing, health care, telecommunications, health benefits, and entertainment industries reported plans to open new facilities, expand operations, and hire new workers. Several of these contacts cited proximity to the distribution infrastructure within the District as a major reason for their investment. Some firms in the freight industry have added fuel surcharges to their delivery cost. A large District retailer indicated that it has no plans to raise prices to pass on rising costs to consumers.
Real Estate and Construction
Home sales continue to increase throughout the Eighth District. July year-to-date sales increased by 7 percent in Louisville and over 6 percent in Memphis compared with the same period in 2004. In St. Louis, July year-to-date home sales remained virtually unchanged. Residential construction has been lagging in the majority of the District's metro areas. July year-to-date single-family residential permits declined in Jackson, Tennessee, in Evansville, Indiana, and in Owensboro, Kentucky. In contrast, permits were up in Fayetteville and Little Rock, Arkansas, as well as in Louisville and Memphis.
Commercial real estate markets in the District continue to gain strength. The second-quarter industrial vacancy rate declined in Louisville, Memphis, and St. Louis. Office vacancy rates in these cities decreased as well. Contacts report that commercial construction is up in Paducah, Kentucky, while contacts in Evansville, Indiana, report only moderate commercial construction activity. In southern Indiana, contacts report that government construction remains high. Contacts indicate that industrial development is on the rise in both Memphis and northern Mississippi.
Banking and Finance
A recent survey of senior loan officers at a sample of District banks indicates a slight increase in commercial lending activity over the past three months. During this period, credit standards for commercial and industrial loans remained basically unchanged, while demand was moderately stronger. Credit standards for commercial real estate loans, residential mortgage loans, and consumer loans were basically unchanged. Demand for commercial real estate loans was moderately stronger. Demand for consumer loans was generally unchanged, while demand for residential mortgage loans varied from moderately stronger to moderately weaker.
Agriculture and Natural Resources
Despite recent rains throughout the District, overall crop and pasture conditions have continued to deteriorate. Farmers have reported irreversible damage to the corn crop. In Illinois and Missouri, farmers anticipate corn yields at least 30 percent below last year's. Over half of the pastures in Arkansas, Illinois, Kentucky, and Missouri remain in poor condition.
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