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Economic activity in the District continues to be weak, particularly in the manufacturing sector. A small number of manufacturing industries, however, have begun to recover. Retail holiday sales were about the same as last year's and were buoyed by promotions and extended store hours. The residential real estate sector remains relatively strong, although weakness continues in some parts 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, although commercial construction has been expanding in some areas. Credit standards for commercial loans have been tightening, particularly for commercial real estate loans. Deposits at banks rose through the fourth quarter along with mortgage volume and mortgage delinquencies.
Manufacturing and Other Business Activity
The District's manufacturing sector continues to be weak, as reports are dominated by announcements of closings, consolidations, and cutbacks. Affected industries include steel, automotive and tire, furniture, fabrics, tools, electrical products, oil and gas, and aluminum. Most contacts report difficulty maintaining profit levels, which they attribute to declining orders. Nonetheless, some firms in the food, appliance, cardboard, garment, and plastics industries are experiencing expansion and recovery.
The District's holiday sales were slightly below expectations, although in line with sales for the same period last year. Numerous retailers used holiday promotions and longer store hours to lure customers. Apparel, toys, and jewelry were slow movers, while music, video, and home entertainment products have sold well. Travel and logistics companies are still recovering from the demand reductions following September 11th, while sales for grocery stores, hair salons, and dry-cleaning services remain steady. Despite the weakness in retail sales, one major retailer in the District has announced an aggressive expansion that includes the addition of several stores.
Real Estate and Construction
Spurred by lower mortgage rates, home sales across large parts of the District continued to be strong in the fourth quarter. New homes continue to sell well in Arkansas, where October year-to-date unit sales and volume sales were higher than a year earlier. Contacts report a similar experience in October for Memphis, along with a record November for Evansville. On the other hand, sales of homes in the $125,000-to-$250,000 range remain slow in northern Mississippi, where inventories continue to grow. In Memphis, the market for office real estate had a net positive absorption rate for the third quarter of 2001, as it had for the previous quarter. In St. Louis, vacancy rates for bulk space, service center space, and office and warehouse space ended the year higher than they were at the beginning of 2001.
Residential construction opportunities remain strong in most of the District, as November year-to-date permit levels were higher than a year earlier. Commercial construction opportunities have begun to expand in parts of the District. For example, several companies have announced plans to construct manufacturing and production facilities in western Kentucky and southern Illinois. Also, state and local governments in Kentucky and southern Indiana have awarded infrastructure contracts for highways, bridges, and water treatment facilities.
Banking and Finance
A recent survey of senior loan officers at a sample of District banks revealed somewhat tighter standards for commercial and industrial (C&I) loans in the last three months. Contacts report that demand for C&I loans and consumer loans has become moderately weaker due to lower customer financing needs. Internal credit ratings for C&I loans, however, were largely unchanged, as were standards for residential mortgages, consumer loans, and credit cards. In contrast, 60 percent of contacts report a slight tightening of credit standards for commercial real estate loans.
According to contacts, demand deposits and time deposits increased moderately between October and December, while mortgage volume rose following reductions in interest rates. Contacts at local banks in Louisville report increased provisions for loan losses due to an increase in the number of mortgage delinquencies.
Agriculture and Natural Resources
While it is too early to know for certain, the District's dormant winter wheat crop may have been damaged by substantial rain in mid-December followed by frigid temperatures and the absence of a protective snow cover in late December and early January. Following a larger-than-expected crop, cotton prices fell by about 11 percent between late November and early January. Also, contacts remain uncertain about the potential impact that the temporary suspension of the Step II cotton subsidy program will have on exports. In conjunction with the economic slowdown, cattle and hog prices have fallen over the last three months, thereby squeezing profit margins. Reports indicate, however, that profit margins have been boosted by the lower price of nitrogen fertilizer compared with last year, as the price of natural gas--a major cost component in the production of nitrogen-based fertilizer--fell by approximately 75 percent over the period.