January 15, 2003 Federal Reserve Districts Eighth District--St. Louis

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Contacts indicate that economic activity in the Eighth District softened in recent weeks. In manufacturing, reports of plant closings, layoffs, and cutbacks have increased. Retailers report that holiday sales were below expectations despite heavy discounting; the reduced consumer spending was attributed to a shortened shopping season, bad weather, and a weak economy. Home sales are still up in most of the District, and commercial real estate markets continue to be sluggish. Loan demand at small and midsized District banks rose in the fourth quarter of 2002. Manufacturing and Other Business Activity In the Eighth District's manufacturing sector announcements of plant closings, cutbacks, and layoffs has risen since our last report. Manufacturers in the electrical, apparel, furniture, ventilation, auto parts, paper and packaging, lighting, mobile homes, steel, and aluminum industries are among those who have announced plant closings and layoffs. Contacts note that problems faced by the manufacturing sector include fewer and smaller orders, low selling prices of products, increased international competition, and an uncertain economy. A few firms, however, still plan to move to or expand within the District. Early reports of retail sales indicate that most retailers' expectations for holiday spending were not met, despite heavy discounting. Purchases by post-Christmas bargain-hunters may help increase profits but are not expected to close the gap appreciably. Though they continued to fare better than general retailers, discount stores also saw holiday sales fall below expectations. Among the strong sellers were toys, entertainment, and home items, while adult apparel did not sell as well. Contacts attributed the reduced consumer spending to a shortened shopping season, inclement weather in some parts of the District, and a weak economy. Several contacts note that retailers will continue discounting merchandise. Contacts in the trucking industry report that demand is steady, although fluctuations in fuel prices are affecting profit margins. The increasing cost of health-care insurance, driving up labor costs, continues to be a concern across all industries. Real Estate and Construction Residential real estate sales are still up in most of the District. Home sales in the Memphis area were higher in October 2002 compared with the same month last year. Contacts in St. Louis and Louisville report that the real estate market is still steady but leveling off. Home sales are still strong in Evansville. November year-to-date permit levels were higher than the previous year's levels in most of the District's metropolitan areas. In Louisville, housing starts continue to be strong for first-time homebuyers in the $100,000-$130,000 range. Housing starts are booming in the Fayetteville area. In rural western Tennessee, residential contractors report having plenty of work. Commercial real estate markets continue to be sluggish in most of the District. Memphis reported negative absorption in the third quarter of 2002, with abundance of sublease space and increasing vacancy rates. In Louisville, the midyear vacancy rate increased compared with midyear 2001. In St. Louis, the market ended 2002 with positive absorption. Commercial construction opportunities are mixed. Construction activity has been slow in northeast Arkansas. Contacts in Tennessee reported an increase in nonresidential work in November over the same month last year; however, they also indicated a bleak outlook for commercial construction. In central Kentucky, construction of hospitals, churches, and college facilities remains strong. Banking and Finance Total loans outstanding at a sample of small and midsized District banks were up 2.3 percent between early October and early December. This increase was driven by real estate loans, which were up 3.5 percent over the same period. Commercial and industrial loans have increased slightly over the period, growing 0.2 percent. Loans to individuals and to commercial banks have declined 1.4 percent and 0.5 percent respectively. At the same time, total deposits at these banks were up 5 percent. Agriculture and Natural Resources The unusually cold weather in past weeks had a significant effect on District energy use and prices. District diesel fuel and gasoline prices rose 6 cents and 11 cents per gallon, respectively, during the latter half of December. Contacts were concerned that spring fertilizer and fuel will be more costly. Natural gas prices, in general, rose about 33 percent between October and December. District coal production, although down 4 percent from last year, has increased slightly in recent weeks. District farmland values, on average, rose 3.8 percent, from $1,870 per acre in 2001 to $1,941 per acre in 2002. Increased demand for land for investment purposes and recreational use, as well as government subsidies contributed to the rise in prices. Return to top Chicago Minneapolis