January 22, 1997 Federal Reserve Districts Eighth District - St. Louis

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Economic activity has picked up since the last report. District retailers report holiday sales generally met or exceeded expectations, while auto dealers report sales relatively unchanged from a year ago. Other business contacts report continued growth in their industries and are optimistic about the near term; however, a survey of small businesses shows a less favorable outlook for the first half of 1997 compared with a year earlier. Tight labor markets still prevail in many areas. Contacts in the transportation industry report that recent increases in energy prices are being passed along to customers. Real estate markets remain strong in most parts of the District. Loan growth picked up at large District banks during the last two months of 1996. Consumer Spending Most retailers surveyed indicated that sales during the 1996 holiday season generally met or slightly exceeded expectations. On average, sales increased about 7 percent from the previous holiday season. Electronics, jewelry and toys were the big sellers. Post-holiday inventories are at desired levels. Most retailers expect moderate-to-good sales to continue during the beginning of this year. Auto dealers stated that sales during November and December were generally unchanged from a year earlier. Used car sales are still increasing, but this has not substantially affected sales of new vehicles. Most dealers expect sales during the first half of 1997 to remain unchanged from, or be slightly better than, 1996 levels. Manufacturing and Other Business Activity Most District contacts are optimistic about their firms' near-term prospects. Tight labor markets remain a problem for many employers, particularly those in the construction and information technology industries. Some retailers in the southern part of the District had difficulty finding holiday workers. The District's poultry processing industry has been adding new capacity. In fact, one firm that will open a new plant this spring has already announced an expansion. Increased demand from fast-food restaurants has been pivotal in much of this growth. Makers of office electronic equipment are reporting recent capital additions, caused by increased demand, that will also create about 600 new jobs. Manufactured homes are selling well, leading to a new plant in western Tennessee that will employ 250 workers. The steel industry is following Toyota into southern Indiana, with the announcement of a new plant in the area that will employ more than 400 workers. A bank's mortgage division is adding 200 jobs in Louisville because of increased business from a recent merger. Merger activity has picked up in the District, especially in the St. Louis area. Boeing announced it will merge with McDonnell Douglas. Because the company's defense systems division will stay in St. Louis, however, the merger is expected to have a minimal effect on the regional economy. Mercantile Bancorporation will buy Roosevelt Bank, the largest thrift in Missouri. About 50 branches are expected be closed, 30 of which are in St. Louis. A Dutch insurance company, Aegon, is buying the Providian Corporation's insurance business. About two-thirds of the firm's 1,500 Louisville employees may lose their jobs. A contact in the aerospace industry reports that there has been a 25 percent increase in fuel costs over the past year, which has negatively affected profits. In this vein, a large package delivery firm in the District announced that it will pass along recent increases in energy prices to shippers. Likewise, trucking industry contacts report that large carriers will probably push through a 4 to 5 percent increase in transportation costs. Outlook According to a recent survey of 231 small businesses in the Eighth District, the number of respondents expecting a deterioration in business conditions over the first half of 1997 outnumbers those expecting an improving outlook by two-to-one, although a little more than half expect little change. In general, firms in the trade sector were more upbeat, while those in construction and finance were somewhat less upbeat. A similar survey conducted a year ago indicated more optimism among small businesses. Real Estate and Construction Residential real estate markets remain strong in most parts of the District, with sales of both new and existing homes up slightly. Monthly residential construction permits in November, however, were down in all 12 District metropolitan areas. On a year-to-date basis, permits were up in almost all metro areas. Commercial construction is strong all around the District. Some commercial real estate agents have noticed a weakening in the apartment and industrial markets in the southern parts of the District, however. Banking and Finance Total loans outstanding at 11 large District banks rose 1.1 percent during the last two months of 1996. In contrast, total loans increased 0.1 percent in September and October and declined 0.1 percent during the last two months of 1995. All categories of loans showed increases, with consumer loans posting the largest increase, 1.9 percent. Total deposits rose 0.5 percent in November and December. Return to top Chicago Minneapolis