June 14, 2000 Federal Reserve Districts Eighth District - St. Louis

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Outside of softening in some home and vehicle sales, business conditions in the District remain steady overall. Motor vehicles sales are down from a year earlier, in some cases substantially. Higher interest rates and gasoline prices are frequently cited as causes. Retail sales, on the other hand, are up from a year earlier, although many contacts report that sales fell below expectations, primarily because of sales to online vendors. Tight labor markets continue to affect many firms' ability to meet output demand. High fuel prices are pinching profits at trucking firms. Home sales and construction have slowed as interest rates have risen. Credit standards for loans have not changed recently, but demand for some real estate and consumer loans has weakened. Drought-like conditions are still the norm in most parts of the District, even after some rainfall in late May provided temporary relief. Consumer Spending Retailers report that sales during April and May are up about 4 percent on average from a year earlier. Department stores showed the strongest growth, up almost 8 percent in some cases, while gift and specialty stores recorded sales declines. More than half of the contacts note that sales growth fell below expectations, with about a quarter citing online sales, especially of electronics, as a reason. Shoes, women's accessories, lawn and garden supplies, and electronics all have been posting weak sales. Appliances, jewelry and women's apparel, on the other hand, have been strong sellers. For the most part, retailers' inventories are at desired levels. Contacts are optimistic about the summer, expecting sales to increase between 4 and 5 percent over a year earlier. Car dealers report that sales in April and May are down about 6 percent on average from a year earlier. In some instances, declines of up to 20 percent have been reported. Many contacts cite rising interest rates and gasoline prices as causes of the slowdown. With more than half of the contacts reporting that vehicle inventories--especially of SUVs--are above desired levels, many dealers are raising rebate amounts to move vehicles. Most dealers, however, remain optimistic that sales this summer will pick up. Manufacturing and Other Business Activity Contacts report stable business activity in the District, although tight labor markets are still a major problem for nearly all industries. Some firms continue to note that labor shortages are restricting their output capabilities. Hit especially hard have been retail establishments, manufacturing firms and hospitals, which are raising starting hourly wages by $1 or $2 to attract workers for positions ranging from nurses to cashiers. Many other firms are coping by recruiting overseas workers to fill positions. Hotels and retail stores report offering career counseling, job training and child care to attract employees. High fuel prices are taking a toll on District transportation and trucking firms, which continue to surcharge customers 3 to 6 percent to maintain profits. Most trucking companies posted first-quarter losses, but hope to break even in the second quarter. Labor shortages and fuel prices notwithstanding, contacts report steady business activity. Numerous firms are expanding or moving into the District, among them, many high-tech companies. An online customer support firm, which recently opened in St. Louis, will create 600 jobs by year-end; two Internet companies are opening in Louisville, together creating about 150 jobs. Six other expansions and openings in Louisville and Memphis will bring about 650 jobs to the District in the next few months. A handful of closings have also occurred. An abrupt closing by a Memphis paper products producer, due to the loss of its largest customer, eliminated 300 jobs. Competition in the food industry will result in a major grocery store chain closing 20 stores within the District by July. Real Estate and Construction Residential home sales throughout the District continued to slow moderately in May. Some real estate agents have noted longer turnaround times, especially for new single-family homes, and a growing inventory of houses. Agents expect sales to continue slowing--but not to fall off substantially--during the year because of higher interest rates. Median prices for homes in April are down from a year earlier. District-wide residential construction, mirroring the sales reports, declined slightly in April, although it remained at a high level. Year-to-date and monthly building permits are down from their year- and month-earlier levels in most areas of the District. Commercial real estate markets, particularly sales and leasing of office space, are holding steady. Some new construction projects, however, have reportedly been put on hold because of higher interest rates. Banking and Finance According to respondents of a recent Senior Loan Officers survey, credit standards for all loan categories are unchanged. Respondents also report that demand for commercial and industrial loans and for commercial real estate loans remains unchanged. Demand for residential real estate loans, on the other hand, is weaker. Half of the respondents note that demand for consumer loans is weaker, while the other half have experienced no change. Banks continue to have trouble attracting deposits. Agriculture and Natural Resources Drought-like conditions continue to affect much of the District. Although temporary relief arrived in late May--when widespread rainfall across the District helped replenish topsoil moisture in all states except Mississippi--more is needed to bring subsoil moisture to adequate levels. Despite the dry conditions, unseasonably warm spring weather allowed for an earlier-than-normal planting of the major crops in most parts of the District. The corn, soybean, winter wheat, rice and cotton crops are in good-to-excellent condition in most areas, with only isolated insect problems being reported. Return to top Chicago Minneapolis