March 7, 2001 Federal Reserve Districts Eighth District - St. Louis

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With energy prices remaining high, manufacturing activity weaker and several spates of severe winter weather, the pace of District economic activity has slowed noticeably. Businesses generally report little or no employment growth and slowing demand. Concerns about tight labor markets have abated lately. Residential construction is down, although low mortgage rates recently have revived home sales. Credit standards for loans, especially consumer loans, have tightened, while loan demand has weakened. Crop and livestock prices have rebounded somewhat from their lows. Timber farms suffered major damage from ice storms earlier in the season. Manufacturing and Other Business Activity Contacts report considerable weakening in the manufacturing sector in most areas of the District, with little or no employment growth and slowing demand. Several plants, including those in the steel and plastics industries, are closing or laying off workers to stem losses. Major automobile manufacturers have idled plants for as many as three weeks to pare unanticipated inventory gains, which have resulted from slow sales. The high-tech sector continues to experience layoffs and closings, with firms in the Memphis and St. Louis areas eliminating more than 400 jobs. Contacts note that concerns over tight labor markets have abated over the past two months, as many areas experience upticks in their unemployment rates. High natural gas prices, coupled with cold winter weather during the past two months, are squeezing profit margins at many firms, especially in the health care and manufacturing industries. Most firms, however, have been reluctant to pass on higher costs to consumers and, instead, are attempting to minimize their use of natural gas, while exploring options for other sources of energy. A scattering of firms, some in the chemical industry, have reacted to higher energy prices by laying off workers to reduce costs. Contacts suggest that layoffs and plant idlings will spread if high energy prices persist. On top of cost concerns, many firms in Arkansas are still recovering from severe ice storms, which caused heavy damage and forced many to shut down temporarily. Through it all, some industry contacts remain optimistic that demand and employment will rebound. In fact, FedEx Express has announced that it will add 1,500 jobs at its Memphis hub this summer because of its contract with the U.S. Postal Service. Contacts in Mississippi and in the Louisville area anticipate a pick-up in demand and employment growth over the next few months. Real Estate and Construction Severe winter weather in late 2000 bit into new residential construction strikingly. At year-end, residential permits in almost all District metropolitan areas were below their year-earlier levels, in some cases, substantially. Home sales, on the other hand, which had also been falling, have rebounded, as low mortgage rates spur new or "upgrade" buyers into the market, especially in Little Rock and Memphis. The recent pick-up in sales has helped reduce housing inventories that had been growing. Real estate agents are optimistic about home sales in the coming spring, provided that mortgage rates do not increase significantly. Nonresidential construction has also felt the bite of bad weather. In Memphis, for example, commercial contractors report that the number of bidding opportunities has declined, which translates into projects not being booked as far in the future as usual. In Mississippi, contractors report that the number of major projects being planned, such as casinos and hotels, is waning. Banking and Finance Senior loan officers at District banks report that credit standards for all loan categories, except residential real estate loans, have been tightened recently, with consumer loan standards being tightened the most. Lenders have increased spreads and credit score requirements on consumer loans. At the same time, demand for all types of loans has weakened noticeably. One exception, though, is refinancings, which have picked up some steam in recent weeks as mortgage rates remain low. Bankers are noticing some uptick in nonperforming loans, and many, especially those in western Tennessee, are becoming increasingly concerned about a potential rise in personal bankruptcies because of weaker economic conditions. Agriculture and Natural Resources Corn and wheat prices have rebounded after bottoming out last August, while feeder cattle prices continue to rise because of ongoing increases in demand. A cotton industry contact reports that plantings this spring are expected to increase slightly, even though domestic mill use remains stagnant and exports to Mexico and Turkey are below expectations. Although an industry organization expects U.S. cotton farmers to increase acreage modestly on average, farmers in the Mid-South region plan to increase planted acreage by nearly 11 percent this year. Ice storms in the southern part of the District severely damaged timber farms, leaving many trees unusable for lumber. To recoup some of these losses, several producers chipped the damaged timber into pulp. Demand for lumber, however, has continued to decline, as southern pine lumber mills report that orders and production in 2000 were markedly below 1999 levels. Return to top Chicago Minneapolis