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Business conditions in the Eighth District were mixed at the end of 2003. Some contacts in manufacturing and services reported improved employment and investment conditions, while other contacts in manufacturing and services reported layoffs, plant closings, and flat or reduced capital spending. Retail and auto sales increased in November and December compared with the same months of 2002. Home sales were still up in most of the District, but commercial real estate markets continued to be slack. Loan demand at a sample of small and mid-sized banks declined slightly between early September and early December.
Manufacturing and Other Business Activity
Business activity in the Eighth District experienced mixed conditions since our last report. Some manufacturing contacts reported increased employment, facility expansions, and increased capital spending, while others reported decreased employment, facility consolidations, and flat or decreased capital spending. Plant openings and expansions were concentrated in the building materials, automobile, and auto parts industries. In contrast, firms in the biotechnology, food processing, and tobacco industries announced plant closings and cutbacks. In the services sector, contacts in the health care and banking industries announced plant openings and expansions. A District hospital reported they would add additional acute-care beds and would hire new employees. In contrast, a major airline announced that it would close its call center, eliminating additional jobs in the District.
General retailers reported increased sales in the last two months of 2003. Sales at clothing and discount stores were up from last year, as was traffic at many District malls. In some areas of the District, contacts estimate that consumer spending increased as much as 15 percent compared with the same months of 2002. A major discount retail chain is opening three new stores in March 2004 and will be hiring new employees. Similarly, many new car dealers reported strong sales at the end of 2003. Some contacts cited the continuation of incentives as one reason for strong sales. Many contacts reported that, because of the strong new car market, the used car market has not been as robust. Both retailers and auto dealers are cautiously optimistic about strong sales throughout 2004.
Real Estate and Construction
As 2003 came to an end, home sales continued to do well in the Eighth District. November year-to-date sales in the Memphis area were up by 9.2 percent compared with November 2002. November year-to-date home sales were up by 17.0 percent in northern Kentucky and in southern Indiana, as well. Residential construction was up in most of the District's metropolitan areas compared with November 2002. Construction was brisk in northeast Arkansas, with no slowdown in sight. October year-to-date permit levels increased by 2.0 percent in the greater St. Louis metropolitan area, and contacts reported that residential construction is steady in west Tennessee.
Commercial real estate markets remained slack in most of the District. In St. Louis, the industrial vacancy rate fell to 7.3 percent in the fourth quarter (from 7.5 percent in the third quarter); the office vacancy rate, however, increased by 1.7 percent to 17.2 percent. Louisville's third quarter office vacancy rate was 20.4 percent, a modest increase from 19.7 percent in the second quarter, while the industrial vacancy rate fell to 8.7 percent from 9.1 percent in the same time frame. The Memphis area's third quarter vacancy rates were 15.3 percent for the office market and 19.9 percent for the industrial market. Commercial construction seems to be improving throughout the District. Contacts in Danville, Kentucky, and northeast Arkansas reported that construction is strong, and contacts in west Tennessee reported plans for several new projects.
Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks were down 4.4 percent between early September and early December. This decrease stems primarily from real estate loans, which declined by 6.3 percent over the same period. Commercial and industrial loans increased 4.4 percent over the same period. Loans to individuals and loans to commercial banks declined slightly by 1.7 percent and 0.3 percent, respectively. At the same time, total deposits at these banks showed a modest decrease of 0.4 percent.
Agriculture and Natural Resources
Although the impact of the mad cow disease on the District remains to be determined, District prices of beef cattle for slaughter rose from November to mid-December, except in Illinois. Meanwhile, commercial red meat production and cattle and calf slaughter decreased in November compared with November 2002. Coal production in Illinois, western Kentucky, and Mississippi declined slightly in December compared with the same month last year. December year-to-date production for the District was down 4.5 percent from 2002. Contacts anticipate that the price of natural gas will be higher in 2004 because of the depletion of last year's stock, which will affect nitrogen fertilizer prices when the planting season arrives.
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