November 28, 2001 Federal Reserve Districts Eighth District - St. Louis

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Economic activity in the District has been buoyed by stronger than expected retail sales, although the manufacturing sector has continued to weaken. Retail sales were generally higher in October compared with a year earlier, with sales at or above most retailers' expectations. Sales of new automobiles in the month were much higher than average, which dealers attribute to manufacturers' incentives. The residential real estate sector remains relatively strong, although weakness is appearing in some parts of the District. New housing permits, though, continue to be higher than a year earlier. Commercial real estate markets have continued to weaken, and vacancy rates for commercial space have risen. Total loans by small and mid-sized banks were up modestly, along with deposits. Despite heavy rains in some parts of the District, the fall harvest of many crops is nearly complete, and the winter wheat crop is rated as good-to-excellent. Consumer Spending Contacts report that spending in October was slightly higher than at the same time last year. More than one-half of the retailers surveyed noted that the increase in sales was above expectations, while a little more than one-third felt that they were below. Toys, electronics, home furnishings, children's apparel, and basic items were strong sellers, while jewelry, gift-type items, and tourist-related products were moving slowly. Retailers were about evenly split between those with inventories at desired levels and those with excess inventory. Several contacts reported that discounting and promotions would be used to move the excess items. With the holiday season coming up, retailers are cautiously optimistic about sales for the rest of the year: Some expect a small, single-digit increase in sales from last year, while others expect sales to remain flat from 2000. Car dealers in the District report that sales were above average for October, following below-average sales in August and September. Almost all contacts attribute this to financing incentives and rebates offered by manufacturers. Because of these incentives, new car sales in October were much better than used car sales. A few contacts saw an increase in the rate of acceptance of finance applications, but most noted no change. Dealers indicate that their optimism about future sales depends on the continuation of manufacturers' incentives. Manufacturing and Other Business Activity The District's manufacturing sector continues to be weak. Companies are still experiencing difficulty generating profits because of reduced orders. Consolidation, cutbacks, and closings remain commonplace. Affected industries include auto and tire, boat, appliances, electronic materials, clothing, metals, chemicals, and other durable goods manufacturers. Most contacts report low consumer confidence and a "wait and see" period. On the bright side, there are reports of steel, furniture, plastics, and printing companies hiring, expanding, or moving into the District. Districtwide, the services sector continues to experience slow-to-no growth. To cut costs, several contacts noted that they are reducing their advertising expenditures. The communications sector is mixed: While still posting positive growth for long distance, wireless, and data services, contacts report that communications companies are decreasing capital spending and are consolidating. Contacts are not expecting much of an upturn, if any, in 2002. The travel-related service sector (airlines, travel agencies, motels, etc.) is still experiencing reduced volume following the attacks of September 11. Contacts, however, hope to see an increase in business during the upcoming holiday season. Although the trucking industry continues to see less freight, the decrease in fuel prices is helping to maintain costs. Real Estate and Construction Residential real estate sales remain mixed across the District. New homes priced below $250,000 continue to sell well in Little Rock, while Memphis realtors reported a slight decline in September closings. Sales in Louisville are down from the same period a year ago, and a surplus of homes in the Mississippi region is creating a buyer's market. Buyers and potential tenants for commercial real estate are cautious in Little Rock. The Memphis industrial and warehouse market experienced a very high absorption rate over the second quarter of 2001 and continues to offer plenty of distribution space. However, the vacancy rate for the St. Louis market has continued to rise through the end of the third quarter, as it had since the beginning of the year. Residential construction opportunities continue to expand through most of the District as year-to-date permit levels are higher than a year earlier. In contrast, the District's commercial construction opportunities are generally diminishing, although exceptions include the areas of western Arkansas and Memphis, where this activity remains strong. In response, contractors in some portions of the District are moving from industrial projects to local government projects. Banking and Finance Total loans outstanding at a sample of small and mid-sized District banks were up modestly, increasing by 1.7 percent between mid-August and mid-October. This stems primarily from a 70 percent increase in interbank lending. Contacts have also reported a modest increase in real estate loans of about 1.4 percent, while commercial and industrial loans have declined modestly over the period--by about 0.5 percent. At the same time, total deposits at these banks were approximately 1.7 percent higher. Contacts in Little Rock have also reported a strong demand for mortgage refinancing, residential lending, and car loans. Actual earnings are between 5 and 15 percent below projected earnings for banks in west Tennessee. Contacted banks in northeastern Mississippi have reported good profits, but are experiencing greater loan delinquencies and recording more bankruptcies. Agriculture and Natural Resources The fall harvest of corn, soybean, cotton, and rice crops is nearly complete throughout the District, despite being delayed by several episodes of heavy rain during mid-to-late October. Reports indicate that October was the second, third, and seventh wettest on record in Indiana, Illinois and Kentucky, respectively. Because of the availability of storage space and the long harvest period, no grain transportation difficulties have occurred. While rainfall delayed the planting of the final winter wheat crop, it aided the planted crop's germination and growth and replenished moisture deficits. On average, the District winter wheat crop is rated as being in good-to-excellent condition. Return to top Chicago Minneapolis