August 9, 2000 Federal Reserve Districts Eighth District - St. Louis

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Summary District economic activity not only remains strong, but has accelerated somewhat since the June report. Business contacts report increases in demand and sales in many industries. Tight labor markets continue to stymie some firms' ability to meet demand, as District states and metropolitan areas continue to post historically low unemployment rates. Labor cost increases, however, remain moderate. Home sales are down from their year-earlier levels, as higher mortgage rates keep away some potential buyers. Banks continue to experience little deposit growth, which is forcing them to seek other sources of funds for loans. Recent rains have restored topsoil moisture levels in parts of the District to adequate levels. Crops are generally in good condition. Manufacturing and Other Business Activity Contacts report a pick-up in demand and sales over the past two months. Automobile sales, especially of luxury models, have rebounded from a slow start this year. High gas prices reportedly have had only a marginal effect on sales of SUVs and other vehicles. Demand for nondurable goods, such as food products, is robust. Firms continue to locate their distribution centers in the District because of its central location and its access to the hubs of the major package delivery firms. For example, in September, Wal-Mart will begin building a regional distribution center in Missouri, creating 600 jobs; two other distribution centers in Louisville, now under construction, will create several hundred jobs by year-end. A number of other companies, including several Internet companies, are also expanding and moving into the District. Three e-commerce companies, for example, have recently moved into the Louisville and Memphis regions, creating more than 1,000 jobs. Continued strength in financial markets is leading a St. Louis brokerage house to further expand its headquarters and add 550 new jobs. A major problem for a variety of firms continues to be labor shortages, as District states continue to post some of the lowest unemployment rates in the country. Contacts note that starting wages for entry-level positions are, in some cases, upwards of $8 or $9 an hour. Signing bonuses at many firms are becoming larger for both skilled and unskilled workers. For example, UPS is offering its largest bonuses ever to package sorters who stay on the job one year, and nurses in some parts of the District are receiving $2,000 signing bonuses. In an effort to recruit and retain new hires, some fast food chains are offering free meals, regular pay raises, paid training, and profit sharing. Overall, however, labor cost increases are reportedly moderate. Attempting to consolidate their operations, some firms have closed their less-profitable locations. A shoe manufacturer and a department store in Missouri will close a plant and an administrative office, respectively, eliminating a total of 340 jobs. District employment in both the textile and the electronic equipment industries continues to decline. Real Estate and Construction June home sales in the District are down from their year-earlier levels, with most real estate agents citing higher interest rates as the reason. Median prices for homes in June are generally up from a year earlier, with houses at the "lower end" (under $125,000) reportedly selling faster than those at the "upper end" (between $200,000 and $350,000). Many real estate agents are seeing an increase in the inventory of available homes for sale, giving buyers a better selection in all price categories. Agents in the Louisville area, however, note that there is an excess supply of houses on the market, making for more of a buyers' market than has previously been the case. Monthly residential building permits in June are down from May in most District metropolitan areas; year-to-date permits are down from a year earlier. Despite the slowdown, builders are still experiencing relatively strong demand for homes. Builders believe that high consumer confidence is helping to soften the effect of costlier mortgages somewhat. In the St. Louis region, however, a strike by Teamster drivers of concrete trucks that started in late June has either slowed or halted many projects, especially commercial projects. Some believe the strike could last another eight weeks. Banking and Finance Deposit growth, or lack thereof, continues to be the biggest challenge facing District banks. To meet loan demand, many banks, especially community banks, have been turning to the Federal Home Loan Banks to obtain funds. Without this source of funding, many bankers report, they would not be able to meet loan demand. Bankers also report that interest rate margins continue to be squeezed, as customers become more aggressive in seeking lower loan rates, while the cost of funds remains unchanged or, in many cases, increases. According to a recent survey of large banks in the District, total loans outstanding are up almost 2 percent since late April. Both the real estate and commercial and industrial loan categories are up more than 2 percent over the period; consumer loans, though, are down almost 3 percent. Total deposits at these banks are down more than 4 percent over the same period. Agriculture and Natural Resources With the District winter wheat harvest now complete, early indications from the USDA are that this year's crop will be about 4 percent larger than in 1999. Arkansas, Mississippi, and Missouri are posting the biggest gains. In Illinois, on the other hand, this year's crop is off by nearly 16 percent because of both a decrease in acreage harvested and a moderate decline in yields. Yields in Kentucky and Tennessee are also off from last year's levels, even though the acreage harvested is up. Contacts report that the quality of the harvested crop is good in Arkansas, Kentucky, and Tennessee, but has deteriorated somewhat in Illinois and Missouri, because of sprout damage, disease, and heavy rains late in the growing season. Since the June report, rainfall in northern parts of the District has returned topsoil moisture to adequate levels; in southern parts of the District, however, the topsoil remains moderately dry. Dry weather has also affected pasture conditions in Tennessee and Mississippi, where summer pastures and grass hay fields are becoming less productive and are reportedly in poor-to-fair condition. The corn, rice, cotton, and soybean crops are generally in good-to-excellent condition District-wide; however, in Arkansas and Mississippi, soybeans are in only fair-to-good condition. Return to top Chicago Minneapolis