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The District economy continues to grow at a steady pace despite slowing in the real estate sector and ongoing weakness in the agricultural sector. Although most retailers report that holiday sales were up between 4 and 5 percent from a year earlier, many said that this growth was below expectations. Manufacturers report continued growth in demand, although shortages of workers still plague most sectors. Home sales and construction, which began to slow in late summer, continued this trend through year-end 1999. Real estate lending has, consequently, fallen off. Increases in consumer and commercial lending have offset the decline, however. The fall harvest was better than expected, and the winter wheat crop is in fair-to-good condition.
Consumer Spending
District retailers report average sales increases during the holiday season of between 4 and 5 percent, compared with a year earlier. Discount chains posted the strongest gains (more than 6 percent year-over-year in several cases), while malls saw overall gains in the 3 to 5 percent range. Grocery stores experienced weaker sales increases, except for a few Y2K-related goods like bottled water and certain canned goods. That said, retailers saw no other evidence of consumers stockpiling goods for Y2K. Half of the contacts indicate that sales growth this season was below expectations and cited competition from online retailers and unusually warm weather as likely reasons. The warm weather also hurt sales of winter clothes and boots, but other apparel, toys, and some electronics and household appliances were strong sellers. Retailers expect moderate sales growth of about 3 percent during the first quarter of 2000.
District car dealers report that December sales increased on average about 4 percent when compared with the same period a year earlier. However, sales were not evenly distributed. Dealers who had the inventory saw relatively strong sales gains, upwards of 20 percent in some instances. Those who did not have, or could not get, the inventory saw large sales declines. Contacts generally do not believe that recent higher gas prices affected sales, even of sport-utility vehicles and pickup trucks. Dealers are optimistic about the first quarter of 2000, with some predicting as much as a 10 percent sales increase over first quarter 1999.
Manufacturing and Other Business Activity
District contacts report continued overall strength in the manufacturing sector. Demand for automotive parts and appliances continues to be robust, which has led to the expansion of three plants in Louisville and the addition of 400 jobs. Other plant expansions are also under way in the District. For example, the lumber and wood products, metals, electronic equipment, paper, and high-tech industries all experienced employment gains. Six high-tech firms in the Memphis and Louisville regions are expanding, which will add a total of 850 jobs. These firms include an Internet service center and several distributors of computer supplies, telephones and consumer electronics. International Paper Co. is adding 500 employees at its Memphis plant.
Despite the strong economy, a small number of closings have been reported, most notably a trucking company that closed in December, taking with it 1,000 jobs. A Memphis steel plant closed because of financial problems, eliminating 250 jobs, while a producer of telephone cables laid off 300 workers because of a mild slowdown in the telecommunications industry.
Tight labor markets continue to stifle some businesses, as District unemployment rates remain at record lows. Contacts report that some construction projects are still behind schedule because of high worker turnover and a lack of available skilled workers. The shortage of workers also affected retailers, who were forced to search for holiday help much earlier than usual, offer more flexible hours and, in a few cases, increase pay to compete for workers. Several Target stores, for example, raised the starting hourly wage for some of their seasonal workers by almost 50 percent. All told, though, wage increases appear to be limited.
Real Estate and Construction
Although sales of new and existing homes remain relatively high in some areas of the District, sales growth has continued to slow in most of the District. This slowing has affected new residential construction, which was down in almost all District metropolitan areas in November. Real estate agents and builders cite higher mortgage rates as a reason. Builders have also noticed an ongoing decline in foot traffic at their properties. Early indications are, though, that year-to-date residential permits hit record levels District-wide, and home sales through late 1999 remained above their 1998 levels. Nonresidential construction slowed somewhat toward the end of 1999 in many District regions, but overall is at about the same level as a year earlier.
Banking and Finance
Total loans outstanding at a sample of large District banks remained essentially unchanged between mid-October and mid-December. Real estate loans, which make up about half of these banks' portfolios, fell about 3 percent over the two-month period. These declines were offset by increases in both consumer loans and commercial and industrial loans. Meanwhile, banks continue to have trouble attracting deposits, with total deposits down about 2 percent over the same period.
Agriculture and Natural Resources
The fall harvest of corn, soybeans, rice and cotton was better than expected. The winter wheat crop appears to be in fair-to-good condition in most parts of the District, despite being planted under less-than-ideal soil moisture conditions. Recent rains have helped significantly, although some areas in Kentucky still report dry soil conditions. Foreign demand for corn and cotton has recently picked up, but has remained unchanged for soybeans. Still, reports indicate that this uptick in foreign demand has not been enough to help some farmers meet their loan obligations. A few have started selling assets to meet their loan payments and avoid delinquency.
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