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District economic activity, though still operating at a high level, has slowed somewhat over the past few weeks. Retail sales have been weak, with nearly all contacts reporting sales growth below expectations. Cautious optimism reigns among retailers this holiday season. Demand and employment growth have moderated at District manufacturers and other businesses. Still, many firms continue to struggle to fill positions, especially seasonal positions. District home sales and new construction are both down from their year-earlier levels, although downward trends have been leveling off. Banks report mixed changes in loan demand: an increase for commercial and industrial loans, a decrease for real estate loans. Favorable weather has enabled farmers to complete the harvest early. Corn and soybean yields are up in most District states.
Consumer Spending
Retailers report that sales in October and November, when compared with the same period last year, have been weak--down about 4 percent on average. In a few cases, sales are down by more than 10 percent. Nearly all contacts note that sales growth has not met expectations. Unseasonably warm weather in October led to lackluster sales of several items, particularly winter clothing, shoes and outerwear. More recently, though, sales have rebounded somewhat, with items such as fine jewelry, toys and video-game consoles moving quickly. Sales of other electronics and durable goods--such as washers and dryers--are reportedly robust as well. Most contacts note that inventories for the upcoming holiday season are at desired levels. Retailers are cautiously optimistic about sales during this holiday season, with many expecting growth of about 5 percent over a year earlier. Those retailers that conduct business over the Internet expect online sales to post very strong growth over last year.
Car dealers report that sales, especially of used cars, have been weak over the past two months--down 5 to 10 percent on average over a year earlier. Higher interest rates and a recent dip in consumer confidence have been cited as reasons. Half of the contacts note that current inventories are at desired levels; the other half have inventories that are slightly overstocked. Although expectations about sales for the rest of the year are mixed, more than half of the dealers are optimistic that sales will pick up in December.
Manufacturing and Other Business Activity
Contacts report that demand and employment growth have moderated over the past two months. A number of plant closings have eliminated several hundred jobs in the District. Most notably, a paper producer in southern Arkansas plans to lay off more than 2,500 workers early next year to streamline operations after acquiring another firm. The District's textile industry continues to shrink, as an Arkansas firm announced layoffs of nearly 800 workers. Several District hospitals are starting to report cutbacks on staff because of declining government reimbursements that have strapped them financially. Contacts note that the flourishing high-tech sector has waned as of late. For example, in St. Louis and Louisville, a large number of nascent Internet companies have laid off workers as growth prospects have dimmed. The automotive industry, which has been experiencing slower demand, has idled workers at a few District plants for at least one week to pare inventories. A decision to upgrade equipment at General Electric Appliance Park in Kentucky, though, will save 800 jobs that were going to be cut to streamline the production of dishwashers. GE still plans to eliminate 400 jobs at the park.
Tight labor markets have made the search for holiday employees difficult. Firms continue to use job fairs and offer retention bonuses and large employee discounts to attract and retain workers. Some contacts report offering wages of $9 per hour for clerk and counter help. Stores increasingly report attracting new workers, such as retirees, into the labor force to fill vacancies.
Real Estate and Construction
In November, home sales in most District areas have continued leveling off. Year-to-date sales are below last year's, when they were generally at record highs. Real estate agents report optimism about the rest of the year, as median house prices are still near or above year-earlier levels. Reports from the Little Rock area indicate that new homes have been selling better than existing homes.
As with home sales, residential construction has continued to level off. New building permits are down from a year earlier. Nonresidential construction has also slowed, with some reports of more general contractors bidding on each job now than earlier this year. A positive side effect of the general slowing in all construction is that material shortages are less frequent. Backlogs of orders have also kept construction companies busy, with large projects continuing in many areas.
Banking and Finance
Respondents to a recent Senior Loan Officers survey report that credit standards for almost all loan categories remain unchanged. Some tightening of standards for commercial real estate loans has occurred, though. Terms on some commercial and industrial (C&I) loans have been tightened moderately because of what banks view as a reduced tolerance for risk and signs of worsening industry-specifics. Demand for all loan products is more varied. Some respondents indicate stronger demand for C&I loans, while others note weaker demand for commercial and residential real estate loans.
Agriculture and Natural Resources
Many areas across the District have experienced favorable weather conditions since mid-October, which enabled farmers to complete the harvest early. Rainfall in mid-November across much of the District helped return topsoil moisture to adequate levels and should prove beneficial to both seeded and newly established winter wheat. The winter wheat crop reportedly is in good-to-excellent condition in Illinois, Indiana, Kentucky and Arkansas, average condition in Missouri, and poor-to-fair condition in Mississippi.
Surveys and reports indicate that this year's corn yields in all District states except Arkansas and Mississippi are well above last year's yields. Soybean yields are also rising modestly in these states. In Arkansas and Mississippi, on the other hand, both corn and soybean yields are below their year-earlier rates. A contact in Kentucky reports that tobacco yields are above average and are exceeding producers' expectations. Reports from contacts in several District states note that because some grain terminals are filled to capacity, they have had to temporarily store excess grain on the ground.
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