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District economic conditions remain quite healthy. Although the pace of growth does not appear to have slowed much, particularly in view of recent financial market unrest, there is some expectation of moderating labor market demand over the last three months of the year. Retailers report that summer sales either met or exceeded expectations and are upbeat about sales prospects for the rest of the year. Auto sales have been up moderately at non-GM dealers. Tight labor markets still reign in most of the District, and most contacts report continued strong demand for their products. Sales of new and existing homes have held up well, and new construction remains strong overall. Compared with the average of three months earlier, the most recent Manpower survey indicates some tempering of the demand for labor in the fourth quarter. Loan demand at several large District banks appears to have slowed during the past two months.
Consumer Spending
District retailers report that sales in July and August were up 4 percent on average over a year earlier, which met or exceeded their expectations. Electronics, apparel, and lawn and garden items have been in high demand; fine jewelry has not. Current inventories are smaller than earlier. Contacts have not yet observed a falloff in sales because of the swings in the stock market and are optimistic about sales prospects for the rest of the year. The District's GM dealers contacted saw sales fall by an average of 25 percent in July and August from a year earlier because of lack of product. Other dealers report that sales were flat to up moderately. Despite the GM strike and weak Asian currencies,
contacts believe that, for the most part, brand loyalty kept many customers from leaving GM. GM dealers do not anticipate wide usage of rebates or other incentive programs any time soon, mostly because of reduced inventories, although many other dealers do. Overall, contacts are cautiously optimistic about sales prospects for the rest of the year.
Manufacturing and Other Business Activity
Despite the wild ride stock markets have taken over the past few weeks, most contacts report that they have not seen a major change in economic fundamentals, at least not yet. Labor markets remain tight in most parts of the District, with the demand for skilled labor, in particular, extremely high. Some contacts have seen moderate rises in compensation packages recently. Sales remain relatively robust, especially in industries providing construction-related items, like building materials and household appliances. Reports of business expansions have not tapered off. Contacts in the electronics and paperboard industries report growth in productive capacity and employment because of increasing demand. A report about the District's furniture industry cited recent plant openings, with additional capacity in the pipeline. Ebbing domestic and foreign tobacco demand, however, has led to additional layoffs on top of the workforce reductions already occurring through early retirement and attrition.
Real Estate and Construction
Sales of new and existing homes continue to boom throughout the District, keeping turnaround time short and prices up. Monthly permits for new residential construction, however, slowed in July in all but three of the District's 12 metropolitan areas. Compared with a year earlier, though, year-to-date permits are up in nine metro areas and are on pace for a record year, especially in Little Rock, Louisville and Memphis. Commercial construction has shown early signs of slowing in some areas as demand slackens slightly and vacancy rates creep up modestly. Construction of new apartment complexes, though, remains strong, particularly in the Little Rock and Memphis areas.
Labor Outlook
According to the latest Manpower quarterly survey of businesses in the four major cities of the Eighth District, the growth in demand for labor is expected to taper off some later this year. On average, net business hiring (the percentage of respondents intending to add to staff levels, less the percentage intending to subtract from current staff levels) is expected to be down by about 10 percentage points during the fourth quarter compared with the same period three months ago. The greatest drop is expected to be in St. Louis and Memphis.
Labor market conditions are expected to slacken only modestly in Louisville, with roughly no change expected in Little Rock.
Compared with the same survey a year earlier, net business hiring on average is expected to be down even more, about 13 percentage points, with firms in all four cities indicating less willingness to add staff. On a positive note, manufacturing firms seem increasingly willing to add employees, which is somewhat of a break from the recent developments.
Banking and Finance
Total loans on the books at a sample of large District banks rose 0.5 percent between mid-June and mid-August. A year earlier, loans increased 1.7 percent during the same time period. Outstanding commercial and industrial loans declined 0.9 percent, and real estate loans dropped 0.2 percent. Consumer loans rose 0.9 percent. Community bankers in the District are still having difficulty attracting retail deposits.
Agriculture and Natural Resources
On average, prospects for the corn and soybean crops are generally more favorable in the northern than in the southern portions of the District, as reports still indicate mostly good to excellent conditions. In the southern parts of the District, by contrast, scattered reports indicate that extended dryness has produced below-average harvested corn yields. Rainfall is reportedly needed in order for the soybean crops to reach their full yield potential. Still, the rice and cotton crops appear to be in mostly good shape.
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