October 23, 2002 Federal Reserve Districts Eighth District - St. Louis

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The Eight District economy has shown signs of improvement since the last report. Several manufacturers report an increase in orders and production over last year, with plans for new investment in technology and expansions. The services industry continues to grow, with activity picking up in freight hauling. Retail and auto sales have leveled off in October, and some retailers foresee the need to offer future incentives. Residential sales and construction continue to increase in the District. The commercial real estate markets appear to have improved moderately in some locations. Commercial construction, however, remains slow. Loan demand at small and midsized District banks was up in the third quarter, particularly for real estate loans. In the agricultural sector, recent storms had mixed effects, damaging some crops but benefiting pastures. Harvest conditions for several crops are reported to be lagging last year's pace. Manufacturing and Other Business Activity Manufacturing in the Eighth District continues to recover. Manufacturers in the copper, steel cable, tool, plastics, gift-wrap, recycling, hydraulics, and aluminum industries have announced plans for moving to the District, expanding business, or investing in technology. Several of these contacts note an increase in orders and production over 2001. Reports from the food and auto parts industries are mixed, with some contacts noting an increase in business and expansion while others are consolidating and laying off. While reports of layoffs are few, some manufacturers note that they will hold off on new hiring. A few electric energy plants in the District have halted construction, anticipating weak prices in the near future and an increased need for cash flow. Contacts note that freight hauling has picked up considerably and that sales of heavy trucks are strong. A few logistics and distribution companies have announced plans to expand operations in the District. After strong sales in September, several auto dealers report that sales of new automobiles have tapered off in October. Discount retailers in the District continue to have stronger sales than general retailers. Reports from clothing retailers indicate slow sales and low traffic. Several retailers expect to offer sale discounts to excite customers. Business owners continue to voice concern over the rising cost of health care insurance, which is pushing up labor costs. Real Estate and Construction Contacts indicate that, primarily due to historically low interest rates, home sales are up in most of the District, with the exception of northeast Mississippi, where sales are down. Mortgage activity is also high, with many people refinancing and first-time home buyers entering the market. In northern Arkansas housing is still in high demand as a result of people moving into the area. In Memphis, condominium sales are at an unprecedented high, up from their year-to-date level. Home sales are also high in Memphis, with those in the moderate and move-up price segments selling the best. In more than half of the District's metropolitan areas, monthly and year-to-date housing permits have increased. According to the Home Builders Association of Greater St. Louis, September marked the third month this year that builders crossed the 400-home mark, compared with only one month in 2001. In Memphis, most residential construction activity is for houses priced under $150,000. Residential construction has been strong also throughout rural western Tennessee. In St. Louis, contacts note that there is positive absorption in the industrial market, especially for bulk space, and that there is a trend in the office market toward newer, better buildings. In Memphis, positive absorption rates indicate that the commercial real estate market is doing relatively well, as newly occupied space has increased in net terms. Despite the improved market for commercial real estate, commercial construction remains weak. In Memphis and St. Louis, in particular, contacts report a slowdown in the market. In Little Rock, however, commercial construction was good this summer, but not as good as the summer of 2001. Private construction is picking up slowly in Louisville, where government construction remains good. Banking and Finance Total loans outstanding at a sample of small and midsized District banks are up, with an increase of 3.4 percent between mid-July and mid-September this year. Real estate loans stand out as the largest contributor to this increase, with a rise of 4.1 percent. Commercial and industrial loans decreased slightly, by 0.5 percent. Loans to individuals and other commercial banks in the United States rose modestly by 0.6 percent and 0.7 percent respectively. The total deposits at these banks were up slightly by 1.1 percent over the same period. Agriculture and Natural Resources Agricultural conditions are mixed. In the Delta region, an abundance of rainfall and strong winds produced by tropical storm Isidore and hurricane Lili in late September and early October have curtailed rice and cotton prospects. While it is too early to assess the damage to these crops, contacts report deterioration in the quality of the crops in many cases. These same rains, however, have been beneficial to pastures that were in mostly poor-to-fair condition throughout the District. The corn crop harvest in the southern portion of the District is virtually complete while the harvest in the northern portion is behind last year's pace in all states except Missouri. The harvest of the District's soybean crop is also behind 2001 levels in all states except Missouri and Tennessee. Similarly, the harvesting of cotton, rice, and tobacco all lag last year's pace. Corn and soybean yields, hurt by a lack of moisture during critical periods this summer, are expected to be lower in most District states. This fall producer cash flows could be squeezed by a decline in government payments under the new farm law, as counter-cyclical payments for grains or oilseeds are unavailable because projected prices exceed the benchmark level. In contrast, cotton and rice farmers can now request government payments because prices for their crops will be below the benchmark level. Return to top Chicago Minneapolis