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Federal Reserve Districts

Eighth District--St. Louis

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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.

Consumer Spending
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 costs.

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.

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Last update: March 5, 2003