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Despite reports of modest retail sales growth during the holiday season, the District economy started the new year showing signs of continued moderate growth. Manufacturers and other business contacts remain optimistic, with orders and inventories at desired levels. Residential construction slowed somewhat in the fourth quarter, while nonresidential construction remained strong in southern parts of the District. Loans outstanding at large District banks rose moderately in the final two months of 1997. District sales tax collections suggest that spending weakened somewhat in the fourth quarter. Contacts in the agricultural sector continue to anticipate a slowing in farm exports because of the crisis in Asia.
Retailers report that sales increased between 2 and 3 percent on average during the 1997 holiday season over a year earlier. About one-quarter of our contacts report that sales were below expectations, despite what seemed like a strong start for the season. Toys and electronic equipment were the strongest sellers, while unseasonably warm temperatures left winter clothing out in the cold. Non-auto inventories are currently at desired levels, so most contacts do not anticipate needing more-than-usual discounting to move merchandise. Retailers expect moderate-to-strong sales during the first quarter of 1998 because of heightened consumer optimism about the economy.
Automobile dealers report mixed sales growth for November and December over a year earlier. Those with sales increases cite lower interest rates, larger rebates and incentives, and stronger local economies as reasons. Those with sales declines blame rising consumer debt levels and tighter credit standards as reasons. More than half of the respondents have used rebates extensively to move stock. But, for the most part, current auto inventories are too high. Generally, though, dealers are optimistic about the first quarter of 1998.
Manufacturing and Other Business Activity
District contacts remain optimistic about economic conditions in 1998, despite continued difficulties with tight labor markets. Some contacts have noted that they have been unable to meet demand because of a shortage of workers. To combat this shortage, one firm is subsidizing bus service from high-unemployment areas to its plant. Most contacts report wage increases of 3 to 4 percent.
Orders and inventories at most District manufacturers are at expected levels. A contact in the meat packing industry, for example, reports a "booming" market because of low pork prices and high demand for sausage products. Even though auto sales have been somewhat sluggish, some suppliers to the auto industry are expanding. For instance, a new stamping plant will open in southern Indiana. The District aerospace industry also got a boost from an expansion of a current Navy contract for jets. UPS reports that its Louisville hub is running even with or a bit ahead of both 1996 levels and 1997 projections. Sluggish sales of home appliances, however, led one company to let its seasonal workforce go early. Slowing apparel sales have led a St. Louis-based retailer to reduce employment by another 100 workers.
Real Estate and Construction
Following a usual seasonal pattern, monthly residential permits in November were down in all District metropolitan areas, except Texarkana, Ark. Year-to-date permit levels, however, were up in four of the District's 12 metro areas. Contacts report that construction of higher-priced homes (more than $250,000) is strong in many areas, although they say it's not clear there is adequate demand for this housing. Much of this construction is speculative. The Delta region of the District is reportedly experiencing strong commercial construction, especially of catfish farms.
Banking and Finance
Total loans outstanding at large District banks rose 2.6 percent in the last two months of 1997; one year ago, loans had risen 1.1 percent during the same period. Commercial and industrial lending was particularly strong at year-end, rising 2.2 percent in the final two months of the year; real estate loans rose 1 percent, while consumer loans increased just 0.1 percent.
State Sales Tax Receipts
Current tax data show that monthly growth in sales tax receipts has been slowing, perhaps signaling a modest retrenchment in the pace of consumer spending. For the three months ending in September, year-over-year growth in receipts was 7 percent. In October, it was 6 percent, and early indications are that November's growth rate was below 6 percent. A cut in the sales tax on food items in Missouri, however, likely explains part of this slowing in the growth rate.
Agriculture and Natural Resources
Contacts in the agricultural sector, particularly those from the rice- and cotton-growing areas, continue to anticipate a decline in farm-related exports to Asian markets. A large farm machinery dealer reports that prices of used machinery have picked up recently; however, price increases for new farm machinery are below those seen last year at this time. Substantial increases in farmland prices—primarily for "good" farmland—have been noted by a few contacts recently. Most believe this reflects isolated instances of farmers securing adjacent farmland, rather than speculative buying.