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Contacts in the Eighth District reported lackluster business conditions in
recent months, with little change from the last survey. In manufacturing, reports
of weak sales, consolidations, closings and cutbacks have continued. Retail
sales during December and January were mostly flat from a year ago but met expectations.
Auto sales over the same period declined. Residential real estate markets are
still strong, while commercial real estate markets remain weak. Over the past
three months, there was essentially no change in lending activity.
Contacts reported that retail sales in December and January were flat to slightly
up, on average, from year-earlier levels. More than 70 percent of the retailers
surveyed noted that sales levels met their expectations, while about 25 percent
of the contacts reported that sales were below expectations. Apparel, shoes,
home items, cosmetics, and winter items were strong sellers, while jewelry,
specialty, and luxury items moved more slowly. Despite a slow holiday season,
over half the retailers surveyed noted that inventories are at desired levels,
while only 20 percent reported excess inventories. Most contacts indicated no
current plans for discounting merchandise. Retailers remained cautiously optimistic
about the next few months, with about 65 percent of contacts expecting a small
increase in sales from last year and while the rest expecting sales to remain
flat or below 2002 levels.
Car dealers in the District reported that sales in December and January were
down over year-earlier levels, on average. Almost all contacts attributed this
trend to an uncertain economy and the threat of war. Several car dealers reported
that used and low-end cars are selling better than new cars, causing inventories
of used cars to be okay-to-low and inventories of new cars to be okay-to-high.
About 35 percent of the contacts surveyed noted higher rejection rates of finance
applications, while the rest saw no change. A third of the dealers surveyed
expect sales to be flat-to-slightly-down over last year in the next few months,
the rest expect a moderate increase.
Manufacturing and Other Business Activity
The District's manufacturing sector remains soft. Reports of weak sales, consolidations,
closings, and cutbacks continue to rise. Most contacts also noted diminishing
orders and low selling prices. Industries affected include packaging, appliances,
automobile parts, fluorescent lights, tools, electrical products, paper, and
steel cable. Contacts see an uncertain economy and increased foreign competition
as the causes for weakness. Several manufacturers are somewhat pessimistic about
the first half of the year. Despite the overall slowdown, a few firms in the
dye, clothing, stationery, and ventilator industries have announced plans to
expand in or move to the Eighth District.
The increasing price of diesel fuel has many contacts from small and midsize
trucking firms concerned about their already narrow profit margins. A major
packing and shipping firm in the District has announced a plan to lay off pilots
in the next year, citing a decrease in shipping volume as the reason for the
cut. In the health-care sector, contacts noted that the nursing shortage has
persisted, especially in the non-urban areas of the District. Contacts in all
industries continued to experience the burden of increasing health-care insurance
Real Estate and Construction
Residential real estate sales are still up in most of the District. Last year
was a record year for home sales in Memphis, with an increase in total home
sales of 20 percent in December 2002 compared with December 2001. In Arkansas,
home sales were very strong the last two to three months of 2002 but slowed
as the weather turned colder. Residential construction is also up in most District
areas. In Louisville, contacts noted that housing starts are booming for homebuyers
in the $100,000 to $150,000 range. Contacts in Fayetteville reported that housing
starts continue to flourish. In the Greater St. Louis area, year-to-date single-family
housing permits as of December 2002 were up 4 percent from 2001.
Commercial real estate markets are still slow in most of the District. St.
Louis continues to experience an increase in office vacancy rates. Contacts
in both Louisville and Fayetteville reported increased office vacancy rates
at the end of 2002. Commercial construction is weak in most District areas.
In northeast Arkansas, activity has continued to be slow and is not expected
to pick up in the spring. In Memphis, contacts reported that there is virtually
no building. In central Kentucky, construction of hospitals, churches, and college
facilities are under way or have just been completed, but several that have
been announced are being delayed because of uncertainty about the economy.
Banking and Finance
A recent survey of senior loan officers at a sample of District banks indicates
little change in overall lending activity over the past three months. Banks'
credit standards for commercial and industrial (C&I) loans remained generally
unchanged by large firms but were slightly tightened for small firms. Most contacts
reported a moderate decrease in the demand for C&I loans for large and small
firms, citing a decrease in merger and acquisition financing needs and reduced
plant investment as reasons. The survey introduced questions about credit default
swaps (CDS), but it appears that banks make very little use of them in either
buying or selling credit risk, because, according to the respondents, CDS are
more expensive, riskier, and more complicated instruments than loans. Credit
standards for commercial real estate loans were tightened somewhat even though
demand remained about the same. Both the credit standards and the demand for
residential mortgage loans were reported to be generally unchanged. Credit standards
for credit card and consumer loans remained largely unchanged, but the demand
for consumer loans decreased moderately.
Agriculture and Natural Resources
Unusually cold weather in the Midwest stressed livestock and threatened winter
crops. Despite a good amount of snow covering the southern part of the state,
Illinois winter wheat ratings have continued to decline. Low levels of topsoil
moisture add to concerns about the survival of the crop. Rains will be particularly
important in late February and March as the crop breaks dormancy. According
to a major survey, cotton producers in the mid-South intend to plant 3.3 percent
more cotton this year than in 2002. The number of catfish operations in District
states decreased, on average, 8.1 percent between 2002 and 2003. Water surface
acres used for production decreased 8.5 percent, on average.