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Recovery in the Eighth District continues at a slow pace. Contacts in manufacturing report few new hires, although some firms plan to expand in or relocate to the District. Some contacts report that they are restructuring with few or no layoffs. The services sector shows moderate growth, with increased activity, particularly in tourism. Retail and auto sales in July and August increased slightly over 2001 levels. Sales of new homes have increased in several District locations, but conditions in commercial real estate markets are mixed. In the last three months, demand for commercial and industrial loans has declined, while demand for residential mortgages, consumer loans, and credit cards has remained mostly unchanged. In the agricultural sector, estimates of crop yields for the upcoming harvest are expected to be below year-ago levels throughout most of the District.
Retail sales showed flat-to-modest growth in the District in July and August, with one half of contacts reporting a slight increase in sales over 2001 levels. More than one half of the retailers surveyed noted that sales met their expectations, while one third expressed that sales were above what they had expected. Apparel, back-to-school items, and infant furniture sold well, while collectibles and gift items moved more slowly. Almost all contacts report that inventories are at desirable levels. Contacts are optimistic concerning fall sales, with three fourths of those surveyed expecting growth compared with last year, while the rest expect sales to be a little below 2001 levels.
Car dealers in the District report that sales in July and August were up slightly, on average, compared with the same period in 2001. Several contacts note that sales of used and low-end vehicles were accounting for a relatively higher-than-normal percentage of car sales, although the rebates and financing incentives are holding consumers' interest in new automobiles. Overall, most dealers reported desirable inventory levels for all vehicles. One third of the dealers surveyed noted higher rejection rates of financing applications, while the rest saw no change. Three fourths of contacts are optimistic about fall sales, expecting to see growth over last year.
Manufacturing and Other Business Activity
The Eighth District's manufacturing sector continues to experience a slow recovery, on average. While some companies are still reporting cutbacks in capital spending, several of these reports indicate restructuring with few or no layoffs. Orders are up for some manufacturing products, including steel, auto components, and home and business products. Several firms are expanding or relocating to the District, including manufacturers in the plastics, cement, and window and door industries. While some contacts note few new hires to replace vacancies, others report that firms are experiencing difficulty finding skilled workers.
The services sector is showing moderate growth, District wide, although several contacts noted that firms are not planning to add new jobs in the next few months. A few contacts noted increased activity also in tourism and the construction of new hotels and restaurants. Reports from the distribution and logistics sector are mixed. While there has been an increase in ground transportation activity over 2001, air delivery operations are below last year's levels. Advertising revenues are also reported to be up. Contacts in the healthcare sector report that the nursing shortage continues to be a problem.
Real Estate and Construction
Contacts in most of the District's metropolitan areas report a healthy residential real estate market. In Louisville, new-home sales increased in June and July. Year-to-date sales in Little Rock, Memphis, and northern Arkansas have kept pace with 2001 levels. Office space leasing has picked up in northern Arkansas, while retail leasing has slowed. In Memphis and St. Louis, high vacancy and low absorption rates have created a buyer's market for office and industrial space. The Memphis market for retail space, however, remains strong, with positive absorption and higher occupancy rates.
Residential construction opportunities have tracked sales, with July monthly and year-to-date building permit levels up in most of the District. Commercial construction opportunities are mixed. Expansions of colleges, churches, and hospitals are driving most of the commercial construction projects in central Kentucky and Arkansas. Contacts in Memphis and St. Louis do not anticipate many new commercial construction projects due to the oversupply of commercial space.
Banking and Finance
A recent survey of senior loan officers at a sample of District banks indicates that, for large firms, credit standards for commercial and industrial (C&I) loans have remained largely unchanged in the last three months, although a slight tightening was reported for small firms. Terms for credit lines and C&I loans, for both large and small firms, also remained largely unchanged. Most contacts reported a moderate decline in the demand for C&I loans due to an increase in internally generated funds by customers and a decrease in capital investment in plant and equipment. Credit standards for commercial real estate loans remained mostly unchanged. Apart from normal seasonal variation, demand for such loans increased moderately. Credit standards and demand for residential mortgages, consumer loans, and credit cards were mostly unchanged, as well. The demand for automobile loans facing banks was reported to have decreased moderately due to zero-interest financing and other incentives provided by dealers and manufacturers.
Agriculture and Natural Resources
An August 1 USDA survey estimated corn yield losses in the District states, with yields in Indiana, Kentucky, and Missouri more than 20 percent below last year. Reports from northeast Kentucky and drought-stressed southern Illinois indicate that some of the corn crop is being cut for silage rather than grain. Soybean yields were estimated to be the same as last year in Arkansas and Mississippi, with losses in the remaining District states ranging from 11 percent to 23 percent. The District's cotton and rice crops, however, remain in good-to-excellent condition and the tobacco crop is in fair-to-good condition. For the upcoming harvest, the USDA survey estimated that District production of corn, soybeans, and cotton was sharply below year-ago levels.
While rainfall in mid-August helped to improve the dry conditions in many locales, the lack of adequate moisture has hampered development of the soybean crop and accelerated the maturation process of the corn crop. As a result, harvesting of the corn crop is under way in the southern regions of the District.