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The economy of the Eighth District expanded modestly since our previous report. Contacts reported improved conditions in manufacturing and continuing growth in the services sector. More contacts in the retail and auto sectors reported decreasing sales in July and August relative to a year ago than reported increasing sales. Reports from contacts in both residential and commercial real estate markets varied across the District. Lending activity at a sample of District banks experienced little change in the three-month period ending in July.
Consumer Spending
Contacts reported that retail sales in July and August were down, on average, over year-earlier levels. About half of the retailers surveyed saw a decrease in sales, while another 38 percent saw an increase. Half of the retailers noted that sales levels met their expectations, 35 percent reported that sales were below what they had anticipated, and 15 percent reported sales above expectations. Summer weather items, apparel, and school supplies were all strong sellers, while furniture and non-essential items were moving more slowly. Approximately 59 percent of the contacts noted that inventories were at desired levels; 27 percent reported that inventories were too high, and 14 percent reported that inventories were too low. About 46 percent of contacts expect that sales will increase in September and October over 2005 levels, while 29 percent expect decreased sales.
Car dealers in the District reported that sales in July and August were down, on average, over year-earlier levels. About 54 percent of the car dealers surveyed reported a decrease in sales, while 35 percent reported an increase. About 31 percent of the car dealers noted that used car sales had increased relative to new car sales, while 8 percent reported the opposite. Also, 31 percent reported an increase in low-end vehicle sales relative to high-end vehicle sales. About 19 percent of the contacts reported higher rejection rates of finance applications, while 12 percent reported more acceptances. Nearly 35 percent of the car dealers surveyed reported that their inventories were too high, while 31 percent reported that their inventories were too low. About half of the car dealers expect that sales will increase in September and October over 2005 levels, while 31 percent expect decreased sales.
Manufacturing and Other Business Activity
Manufacturing activity expanded at a moderate pace. Several manufacturers announced plans to expand operations, open new facilities, or hire additional workers, and a smaller number of firms announced plans to close plants and lay off workers. Firms in the transportation equipment, fabricated metal product, plastics, and auto parts industries announced plans to open or expand facilities in the District. Contacts in the wood product, aerospace, and electrical equipment industries reported plans to hire additional workers and expand operations. In contrast, firms in the motor vehicle, food, and primary metal product industries reported plans to lay off or temporarily idle workers in the District.
The District's services sector continued to expand in most areas. Contacts in the freight transportation and business support services industries announced plans to open new facilities in the District. Contacts in the leisure and hospitality sectors hired additional workers. In contrast, contacts in the health services and air transportation industries reported plans to lay off workers.
Real Estate and Construction
July year-to-date home sales were mixed throughout the Eighth District. Home sales increased 13 percent in Memphis and 4 percent in Louisville compared with the same period in 2005. In contrast, July year-to-date home sales declined by 3 percent in Little Rock and remained virtually unchanged in St. Louis. Residential construction continued to weaken throughout most of the District. June year-to-date single-family residential permits declined in most areas. Compared with the same period last year, permits declined nearly 40 percent in Louisville, 17 percent in St. Louis, 8 percent in Little Rock, and 6 percent in Memphis. Permits, however, were up 26 percent in Jackson, Tennessee, and 25 percent in the Fayetteville, Arkansas, metro area.
Commercial real estate market conditions throughout the District were mixed. The second quarter 2006 industrial vacancy rate in St. Louis and Memphis remained unchanged from that of the first quarter, while the industrial vacancy rate in Louisville declined. During the same period, the office vacancy rate declined in St. Louis and Memphis, but increased slightly in Louisville. Contacts in the Louisville region report more stability and optimism regarding commercial construction than in the beginning of 2006; they note that light commercial construction is declining. Contacts in St. Louis report that industrial development remains strong.
Banking and Finance
A survey of senior loan officers at a sample of District banks showed little change in overall lending activity in the three months ending in July. In this period, credit standards and demand for commercial and industrial loans remained basically unchanged for both large and small firms. During the same period, credit standards for commercial real estate loans varied from unchanged to slightly tightened, while demand for these loans remained unchanged. Credit standards for residential mortgage and consumer loans were generally unchanged. Demand for residential mortgage loans remained unchanged, while demand for consumer loans was moderately weaker.
Agriculture and Natural Resources
Because of recent dry and hot weather in the District, crop and pasture conditions have deteriorated slightly. Sixteen percent or less of the corn, soybean, rice, sorghum, and cotton crops are rated in poor condition. Yields for most crops this year are expected to be on par with last year or better in the District states; corn and soybean yields in Mississippi, however, are expected to be 22 percent lower than last year.
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