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Economic conditions in the Eighth District, particularly in manufacturing, have improved moderately since our last report. Recently, there have been announcements of plant openings, product line expansions, increased spending on research and marketing, and new jobs created. Retail sales in July and August were down slightly, on average, from a year ago. Auto sales over the same period rose slightly. Over the past three months, District banks have seen almost no change in lending activity. Residential real estate markets in the District continue to do well, while commercial markets are still lagging behind.
Consumer Spending
Contacts reported that retail sales in July and August were down slightly, on average, from year-earlier levels. More than 50 percent of the retailers surveyed noted that sales levels met their expectations, although, given the slow economy, they were not expecting much growth. About 25 percent of contacts reported that sales levels were below what they had anticipated. Food, apparel, shoes, home items, and appliances were strong sellers, while gift items, jewelry, specialty, and luxury items were moving more slowly. More than 60 percent of the retailers surveyed noted that inventories are at desired levels, while 25 percent of contacts reported excess inventories. A few contacts indicated continuing plans for merchandise discounting. Retailers remain cautiously optimistic about the next two months, with 95 percent of contacts expecting sales to remain flat or slightly above 2002 levels.
Car dealers in the District reported that, on average, sales in July and August were slightly up over year-earlier levels. Most contacts attributed this to strong manufacturer incentives and heavier advertising, as more than 60 percent of them noted that their use of rebates has increased. About 40 percent of contacts reported that sales of new cars have increased, while 20 percent of the car dealers surveyed reported in increase in low-end vehicle sales. About 40 percent of contacts reported that their inventories are at desired levels, while another 40 percent noted that their inventories are too low because of sales growth and the expectation of the new models towards the year-end. About 60 percent of the dealers surveyed expect sales to increase slightly over last year in the next two months.
Manufacturing and Other Business Activity
The Eighth District's manufacturing sector appears to be getting stronger. Plant openings, product line expansions, increased spending on research and marketing, and new jobs have been reported. Companies in the helicopter, boat, auto and auto-parts, aerospace, pharmaceutical, fiber, wiring, communication, energy, food, appliances, stationery, and printing industries have announced such moves. Firms in the communications, pharmaceutical, and medical products industries have reported higher sales volumes and increased earnings. There has also been an increase in acquisition activity, especially in the magnesium, energy, foam material, and food industries. Business optimism is the highest it has been over the past 18 months; however, many contacts note that the increased costs of health insurance, severance packages, litigation, and natural gas prices have slowed the recovery of manufacturing employment. Despite the positive outlook, there have also been several announcements of plant closings, downsizing, layoffs, higher operating costs, low sales volumes, and negative profits. Affected industries include textiles, bedding, chemicals, wiring, furniture, metalworking, lubrication, and utilities.
Real Estate and Construction
Residential sales are still doing well in most of the District. In June, Memphis year-to-date home sales were 10.3 percent higher than in June 2002. Over the same time period, Little Rock had a 6.1 percent increase and northern Kentucky had a 14.0 percent increase. Contacts report that new home sales continue to be strong despite recent mortgage rate increases. June year-to-date single-family housing permits were up in most of the District's metropolitan areas from last year. Permit levels increased by 22.8 percent in Little Rock and by 5.6 percent in the Memphis area, but decreased by 5.0 percent in the St. Louis area. Commercial real estate markets are still lagging behind residential markets in most of the District. The St. Louis area office vacancy rate was 17.3 percent for the second quarter of this year, up from 16.5 percent in the first quarter; the industrial vacancy rate remained stable at 7.9 percent. The second quarter industrial vacancy rate in Louisville was 21.0 percent, and the midyear office vacancy rate was 20.2 percent---a modest increase when compared with the same period one year ago. Although industrial vacancy rates have also been increasing in Little Rock and in Tupelo, Mississippi, contacts in those two cities report that construction is picking up. Commercial construction is also doing better in other parts of the District, including several new projects being undertaken in Danville, Kentucky.
Banking and Finance
A recent survey of senior loan officers at a sample of District banks indicates little change in overall lending activity over the past three months. Banks' credit standards for commercial and industrial (C&I) loans remained generally unchanged for large and small firms. The responses about the change in demand for C&I loans over the past three months varied from unchanged to slightly weaker. Contacts that reported weaker demand cited a decrease in merger and acquisition financing needs and the availability of alternative funding sources as the most important reasons for the change. The responses about inquiries for future C&I loans varied from slightly increased to moderately decreased. Given the historically low interest rates and the subsequent downward pressure on banks' net interest margins, this survey introduced questions about measures banks have taken to combat this situation. Contacts reported that in the past six months they have increased the use of fees and interest rate floors on C&I loans. Credit standards and demand for commercial real estate, residential mortgage, and consumer loans remained generally unchanged over the past three months.
Agriculture and Natural Resources
District crops are generally in good condition, but corn and soybean development is lagging because of the lack of rain. On average, these two crops are rated over 65 percent in good-to-excellent condition. Illinois and Indiana are considerably behind their five-year averages in corn development. For all states except Arkansas and Mississippi, setting pods in soybeans lags more than 20 percent behind their average pace. Sorghum development is ahead of schedule in Arkansas and Mississippi, whereas in Illinois and Missouri it is substantially behind average (and less than 40 percent is rated in good-to-excellent condition). On average, approximately three-fourths of the cotton and rice, which is developing ahead of its normal pace, is in good-to-excellent condition.
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