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Despite some bright spots, economic activity in the District continues to be weak. Retail sales in December and January were generally at or just below their level from a year earlier, although retailers are mildly optimistic about the upcoming months. The manufacturing sector has been mixed, with some industries continuing to face reduced orders while others have begun to recover. The residential real estate sector has picked up and remains relatively strong throughout most of the District. New housing permits continue to be issued at a higher level than a year earlier. Commercial real estate markets have continued to be stagnant throughout the District, with rising delinquencies in at least one area. Driven by rising real estate loans and loans to banks outside of the District, total loans outstanding at small- and medium-sized banks have risen significantly. Agricultural producers in the District anticipate reduced planted acreage for wheat and cotton in the upcoming year, although there is a great deal of uncertainty as farmers await the passage of the new farm bill.
Contacts report that retail sales in December and January were, on average, at or just below their year-earlier levels, and just under one-half noted that sales had been lower than expected while nearly as many noted that sales were higher than expected. Apparel, shoes, home entertainment and décor, health and beauty products, and seasonal items were strong sellers while jewelry, gift items, and collectibles moved more slowly. Despite a slow season, most contacts noted that inventories were at desired levels, while only 20 percent reported excess inventory. Contacts remain mildly optimistic about the next few months, with about one-half expecting slightly higher sales compared with the same period last year, while most of the rest expect the same level of sales.
Car dealers in the District report that sales in December were higher, on average, but have tapered off since the end of the year. Almost all contacts attribute this pattern to financing incentives and rebates offered by manufacturers on new cars, the most aggressive of which have ended recently. Several dealers reported that, because of ongoing rebate offers, new cars continue to sell better than used cars, causing new-car inventories to be okay-to-low and used-car inventories to be okay-to-high. About one-half of the contacts noted higher rejection rates for finance applications, while the other half have seen no change. Although individual responses about car sales in the next few months varied from very optimistic to very pessimistic, the average dealer was neither optimistic nor pessimistic.
Manufacturing and Other Business Activity
The District's manufacturing sector continues to be weak. Steel, fabric, apparel, paper, auto, oil and gas, and building supplies are among the industries facing reduced orders. Most manufacturers do not expect a turnaround until the second half of 2002. Despite the overall slowdown, a few District firms in the food, coal, energy, and ink industries have been expanding. Districtwide, contacts in the service sector continue to report business as being flat-to-slow compared with the same period last year. In order to cut costs, many firms have decreased advertising expenditures, although a few contacts in the advertising industry noted recovery in television advertising revenues. Contacts in the telecommunications industry are taking a "wait and see" attitude, expecting earnings to rise in the second half of 2002. The tourism industry continues to slow, as contacts in the hotel industry have been reporting a drop in occupancy rates, resulting in reduced profits and layoffs.
Real Estate and Construction
Residential real estate sales have picked up across most of the District, with the exception of northern Mississippi, where the number of homes for sale has risen to a historically high level. December 2001 year-to-date sales in northern Arkansas and Memphis improved over year-earlier levels. Residential sales in central Kentucky continue to do well given the time of the year. A contact in St. Louis reports that a rising quantity of bulk warehouse and general office space, falling rents, and falling absorption rates indicate a buyer's market for commercial real estate. Similarly, Memphis and Louisville finished the year with an excess of office and sublease space due to the failure of Internet businesses. Office-rent delinquencies for Class B and Class C properties in northern Arkansas are slightly higher than normal.
Residential construction opportunities continue to grow, as December year-to-date permit levels were higher than year-earlier levels in most of the District's metropolitan areas. Government-sponsored construction opportunities remain strong in the Kentucky and Indiana portions of the District with the approval of projects for highway and bridge construction as well as projects for public facilities such as libraries and jails. Commercial contractors in Arkansas and western Tennessee report commercial building has been slow over the past few months, but they remain optimistic for 2002.
Banking and Finance
Total loans outstanding at a sample of small- and medium-sized District banks rose by 15.7 percent between late November last year and late January this year. This significant increase stems from an increase in real estate loans, which rose by 22.5 percent over the same period, and loans to other commercial banks in the rest of the country, which rose by 26.2 percent. Commercial and industrial loans and loans to individuals have also increased over the period, growing by 3.5 percent and 9 percent, respectively. Total deposits at these banks were 15 percent higher over the same period.
Contacts in central and northeastern Arkansas, and western Tennessee have reported strong loan demand, particularly for residential lending. Bankers in northeast Mississippi and western Tennessee reported high past-due loan ratios and high bankruptcy filings. Nonetheless, they consider themselves in a good position with high liquidity and loan loss reserves.
Agriculture and Natural Resources
Although crop prices generally remain below last year's levels, one contact reported that District agricultural land values rose by about 5.5 percent last year, with faster appreciation in the District's northern states. Despite more favorable planting weather last fall, District winter wheat producers reduced planted acreage by 7 percent, down 20 percent since 2000. A major survey of U.S. cotton farmers' 2002 planting intentions shows a modest decrease (-6.7%) in acreage from a year earlier. Based on survey results, farmers in the Mid-South region plan to decrease planted acreage by almost 20 percent. Cotton industry contacts report that large domestic and international supplies of cotton in the United States are expected to keep cotton prices relatively low in the foreseeable future. As the 2002 planting season fast approaches, contacts reported that they were uncertain about their crop plans for the year as farmers anxiously await the passage of the new farm bill in Washington.