Economic activity in the Eighth District has improved at a modest pace since our previous report. Business contacts continued to report strengthening wage pressures and difficulties finding qualified workers. On net, businesses reported modest improvements although some contacts remained downbeat. Retailers reported slight increases in sales, with mixed reports on auto sales. Manufacturing firms reported increases in capital spending, and District banks reported strong growth in commercial and industrial loans. Real estate activity remains robust for residential and most commercial property types.
Anecdotal information suggests that wages in the Eighth District rose at a moderate pace, while employment grew modestly and prices remained about the same. Contacts throughout the District reported that the lack of skilled labor will continue to put upward pressure on wages, especially in construction and advanced manufacturing. One contact in the Memphis area reported that the skills gap is affecting production and profitability for area employers. Contacts in the service and healthcare industries around the District reported increases in employment, while contacts in the natural resources and mining industry reported layoffs.
Retail sales growth has been modest since the previous reporting period. Most contacts reported a slight increase in sales compared with 2015 levels. A contact in southern Indiana noted that the ratio of area retail store openings to closings has been about two to one in recent months. In contrast, a northwest Mississippi contact indicated that convenience store sales are down in the region while fuel sales remain flat. Hospitality contacts in Arkansas continued to report favorable occupancy rates. Plans for new hotels were announced in both Louisville and Memphis.
Reports from auto dealers remain mixed. Multiple dealers continued to report a decrease in year-over-year sales since the previous reporting period. Others indicated that recent sales have been strong, especially for trucks. Several used car dealers reported that sales are on pace with or slightly exceeding 2015 levels. Some Arkansas dealers saw an increase in foot traffic due to a mild winter. A few contacts also noted robust sales from their parts and service departments.
Manufacturing activity has increased modestly since our previous report. Several companies reported capital expenditure and facility expansion plans in the District, including firms that manufacture paper products, chemical products, food products, and transportation equipment. Reports from the furniture manufacturing industry have been mixed, and one contact noted that sales to retail customers have been unusually soft for this time of year. Contacts also reported mixed impact from lower energy prices. Manufacturers of heavy machinery reported excess capacity as a result of declining demand from the coal, oil, and natural gas industries, and one manufacturer of mining equipment announced layoffs. Other manufacturers, however, noted benefits from lower prices for heavy machinery and lower operating expenses.
Activity in the District’s service sector has also expanded modestly since the previous report. Several firms, including providers of business support services and food services, announced expansion plans. News from the health care industry was mixed: Several health care providers reported plans to hire new employees and expand facilities, while others in the District announced plans to lay off employees. Reports from the transportation sector were similarly mixed. A contact in the trucking industry reported an increase in revenue and reduced costs from low diesel prices, and others in the industry have announced expansion plans. In contrast, a shipbuilding contact noted a lack of orders from customers shipping petroleum and grain.
Residential real estate activity was strong in most of the District. Compared with the same period the previous year, February home sales increased on a year-over-year basis: 5.8 percent in Little Rock, 22.4 percent in Louisville, 6.9 percent in Memphis, and 0.1 percent in St. Louis. Residential construction activity was modestly positive throughout most of the District. Single-family building permits in February, compared with the same period a year ago, increased in almost all MSAs. About half of contacts expect slightly higher to higher activity in residential construction in the second quarter of 2016.
Commercial real estate activity continued to strengthen throughout most of the District. In most of the regions, vacancy rates have dropped and asking rents have increased. Commercial construction activity strengthened moderately. About 80 percent of construction industry contacts in St. Louis reported that the number of construction projects has increased in the past 12 months and expect the number of projects to increase in the next 12 months. Business contacts reported that the strength in construction remains in multi-family proprieties and build-to-suit construction for other property types.
Banking conditions in the District accelerated in March. Loan growth in all categories is stronger than it was in the previous year. Total loans outstanding at a sample of about 80 small and midsized District banks increased 20 percent in March from the same time last year. Real estate lending increased 20 percent over the period of reference. Commercial and industrial loans increased 26 percent over the period, and loans to individuals increased 40 percent.
Still facing low crop prices, farmers plan to increase acreage to cover as much of their fixed costs as they can. District corn, cotton, rice, and soybeans acreage is expected to be higher last year. Concerns about December flooding impacting the winter wheat crop have been unfounded so far, as more than 93 percent of the crop is rated fair or better. District coal production continues to fall, as February production was more than 24 percent below February 2015.