December 8, 1999 Federal Reserve Districts Eighth District - St. Louis

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The District economy continues to operate at a high level. While there has been a reported pick-up in sales and production at manufacturers, some signs of moderate slowing in other sectors have been detected. Retail sales growth was below expectations in many instances, causing inventories to rise; warm weather was an oft-cited reason. Slowing in residential real estate markets is becoming more apparent as both sales and new construction taper off. While credit standards for all loan categories have remained unchanged, demand for C&I and residential real estate loans has dropped. Unusually warm and dry weather has hampered the germination and growth of the winter wheat crop. Consumer Spending District retailers report that sales in October and November were up on average between 2 and 3 percent compared with one year earlier. Nearly half reported that sales growth was below expectations and that, consequently, inventories exceeded desired levels. Home furnishings, women's apparel, and jewelry were strong sellers, while sales of electronics, appliances and other big-ticket items were flat. A warmer-than-usual fall caused sales of heavy coats, boots and other winter items to be weak. Retailers are optimistic about the holiday season, however, anticipating sales increases of between 5 and 6 percent. Many District auto dealers report that sales have been down significantly (in some cases, by more than 10 percent) compared with the same period one year earlier. Pickup trucks and sport-utility vehicles remain the consumers' vehicles of choice. Several contacts have increased the sizes of rebates both to clear out last year's models and to help move current inventory. Almost all dealers report that inventories are at desired levels, although some truck inventories are still low. Contacts are optimistic about year-end sales. A few dealers, however, anticipate a slow start in 2000. Manufacturing and Other Business Activity Most District contacts report that sales and production have picked up over the past few weeks, with many plants producing at or near capacity. Several contacts, however, continue to report unmet product demand because of the ongoing shortage of qualified workers. In many cases, firms are still relying on out-of-town workers to fill positions. Persistent upward wage pressures, especially for skilled workers (such as electricians, mechanics, and carpenters) have resulted in wage increases of between 5 and 10 percent. Robust sales growth has been reported for medical supplies, plastics and automotive parts. A recent uptick in the demand for appliances has also been noted. The trucking services industry is continuing its trend of strong growth. Toyota announced that it will hire another 500 workers at its Indiana plant to help meet the ongoing robust demand for pickups and sport-utility vehicles. Sales at farm-equipment dealers, however, have been mixed. While one dealer reported exceptional sales due to pent-up demand, another saw sales decline more than 35 percent from one year ago. Real Estate and Construction Most areas in the District, especially Memphis and Louisville, have seen a slowdown in home sales over the past four weeks, with many real estate agents experiencing a noticeable decline in the number of appointments to show homes. Accordingly, housing inventories have recently ticked up. Sales are also off from their year-earlier pace. Nevertheless, many agents still expect home sales in 1999 to set a new record. Monthly residential building permits in almost all District metropolitan areas declined in September, although year-to-date they were above their year-earlier levels. Home builders report a sharp decline in both traffic and demand. The recent shortages of building materials seem to be abating, though, enabling builders to catch up on some of their backlog. Banking and Finance A recent survey of District senior loan officers indicates no change in credit standards for commercial and industrial (C&I) loans, commercial and residential real estate loans, consumer loans and credit cards. Some loan rate spreads (over cost of funds) have eased somewhat, though, because of increased competition. Demand for C&I loans has weakened moderately because of decreased investment in plant, equipment and inventories. Demand for residential real estate loans has also declined, while demand for consumer loans is on the rise. Agriculture and Natural Resources With weather conditions favorable for harvesting throughout most of October and November, the fall harvest in most areas is virtually complete. In fact, a larger-than-expected corn crop in Illinois and the Midwest has created storage problems in some areas, which has forced some grain elevators to store corn on the ground. The planting of winter wheat is winding down, ahead of its five-year average pace in all District states. Where the crop has emerged in southern parts of the District, it is rated in good-to-excellent condition. In northern parts of the District, unusually warm and very dry weather conditions, which continue to reduce soil moisture, have hindered the winter wheat crop's germination and growth. A contact in the cotton industry reports that this year's crop has declined in both quality and yield. Despite a strong U.S. economy, domestic cotton mill consumption has weakened since last year, while foreign demand has increased. Return to top Chicago Minneapolis