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Business activity in the Eighth District continues to show signs of improvement, especially in manufacturing, although reports of plant closings, downsizing, and layoffs continue. Firms in the services sector have reported improvement in business activity and plans for expansions and new hiring. Retail sales in September and October increased over 2002 levels, while auto sales declined over the same period. Residential real estate markets in the District continue to be robust, while commercial markets remain relatively weak. Overall lending activity at a sample of District banks experienced little change over the past three months.
Contacts reported that retail sales in September and October were slightly up, on average, over year-earlier levels. More than 50 percent of the retailers surveyed noted that sales levels met their expectations. About 30 percent of the contacts reported that sales were below what they had anticipated. Home fashions and furnishings, electronics, seasonal items, consumables and edibles, jewelry, apparel, footwear, and sportswear were strong sellers, while electrical appliances, toys, personalized items, health and beauty products, winter clothing, and outerwear were moving more slowly. About 60 percent of the retailers surveyed noted that inventories are at desired levels; the rest reported excess inventories. Retailers are very optimistic about the next two months, with about 80 percent of the contacts expecting sales to increase over 2002 levels.
Car dealers in the District reported that, compared with last year, sales in September and October were slightly down, on average. Most contacts attributed this decline to high summer sales because incentives were offered, effectively transferring sales to the summer from the fall. More than 35 percent of the car dealers surveyed noted that sales of used and low-end cars have increased, while a small percentage reported higher sales of trucks and SUVs. About 60 percent of the contacts reported increased use of rebates, and 25 percent noted that acceptance rates for finance applications have increased. More than 50 percent of the contacts reported that their inventories are at desired levels, while another 30 percent noted excess inventories, particularly for new cars. The car dealers surveyed remain cautiously optimistic about the next two months, with more than 60 percent of the contacts expecting sales to remain flat or to increase slightly over last year.
Manufacturing and Other Business Activity
The Eighth District's manufacturing sector continues to show modest improvement. Several reports of plant openings, product line expansions, increased spending on research and marketing, and new jobs created have continued since our last report. Manufacturers in the auto and automotive, power generation, industrial cleaning, pharmaceutical, foam, sportswear, footwear, packaging materials, and food industries were among those who announced such moves. Firms in the telecom equipment, coal, and brewing industries have reported higher sales volumes and increased profits. State tax incentives and aid for employee training have been increasing for manufacturers in the auto, biotech, and food industries.
Despite the positive outlook, there have also been several announcements of plant closings, downsizing, layoffs, higher operating costs, low sales volumes, and negative profits; affected industries include electronics and electronic components, tools, instruments, clothing, linen, food, and chemicals. In the services sector, firms in the entertainment, investment banking, debt collection services, health services, and automated personnel services industries reported improvements in business activity and plans for expansion and new hiring. Firms in the customer support systems, credit card systems, data management, savings and loans, and airline industries reported reduced business activity and plans for layoffs. Higher utility prices, fewer orders, weaker production, and increased health insurance costs are among the factors reported as hindering economic activity in the District.
Real Estate and Construction
Residential real estate markets remain strong in most of the District. September year-to-date housing sales in the Memphis area increased by 9.3 percent compared with the same month last year. Housing sales continue to be strong in the Little Rock area, with a year-to-date increase of 8.4 percent in September, while Louisville had an increase of 12.0 percent for the same period. Residential construction is also doing well, with year-to-date single-family housing permits up in virtually all of the District's metropolitan areas compared with September 2002. In the greater St. Louis metropolitan area, for example, year-to-date permit levels increased by 2.0 percent. Commercial real estate markets continue to struggle in most of the District. In the St. Louis area, the overall office and industrial vacancy rates increased slightly in the third quarter to 15.7 percent and 7.3 percent, respectively. Contacts in the Memphis area expect the commercial market to improve somewhat during the second half of 2003 and first half of 2004. The recovery in commercial construction is still slow in most of the District. One bright spot is St. Louis, where hospital construction is booming.
Banking and Finance
A recent survey of senior loan officers at a sample of District banks indicated little change in the overall lending activity over the previous three months. Banks' credit standards for commercial and industrial (C&I) loans remained generally unchanged for large and small firms. The demand for C&I loans over the past three months was unchanged according to responses. Over the same period, inquiries for future C&I loans decreased moderately. Credit standards for residential mortgage and consumer loans remained generally unchanged over the past three months; meanwhile, the demand for residential mortgages was moderately weaker and the demand for consumer loans was basically unchanged. The survey included questions on the banks' participation in the secondary market for C&I loans over the past two years. Banks reported that 10 percent or less of their share of adversely rated loans was sold in this market, predominately to U.S. commercial and investment banks.
Agriculture and Natural Resources
Recent weather has been favorable for harvesting crops and has improved pastures. Harvesting of corn is nearly completed, with only Indiana's corn crop being less than 90 percent harvested. Harvesting of soybeans, however, is lagging in Kentucky, Missouri, and Tennessee. Harvesting of sorghum is nearly completed in Arkansas and Mississippi, but in Illinois harvesting lags behind its normal pace. The cotton harvest is almost complete in Mississippi. Winter wheat planting is on schedule, and emergence is ahead of normal, except in Illinois. October yield estimates of corn, winter wheat, hay, and burley tobacco surpass last year's yields, whereas sorghum estimates are lower, and soybean estimates are mixed.