Economic conditions in the District have continued to improve at a modest pace since our previous report, with businesses generally holding a more optimistic outlook than a few months ago. General retailers reported slight increases in sales; auto dealers noted improving sales after mixed results over the past few months. Manufacturing firms reported modestly weaker activity. District residential real estate activity remains strong, and the commercial property market continues to improve. Banks report strong demand from both households and businesses.
A survey of business contacts indicated that wage growth was strong, while employment and prices grew at a modest pace. On net, 50 percent of contacts reported wages during the past three months were slightly higher or higher than during the same time last year, and 20 percent reported employment and prices were also slightly higher or higher. Over two-thirds of hiring managers surveyed reported they are increasing wages and salaries by more than in the past few years to retain existing employees and attract new ones. Wage increases were mainly for those in the management, professional and technical, and sales occupations. Contacts having trouble filling job vacancies primarily cited few applicants or candidates lacking the necessary skills.
Retail growth has been modest since the previous reporting period. Most survey respondents reported no change or a slight increase in year-over-year sales and expect the same next quarter. The majority of contacts indicated that sales met expectations. Contacts from Louisville and eastern Arkansas noted favorable hotel occupancy rates in April relative to a year earlier.
Reports from auto dealers were mainly positive. Most auto dealers noted sales were in line with 2015 levels, and several Memphis used car dealers reported record sales for the month. Multiple dealers noted a shift in demand toward more high-end vehicles. Contacts continued to report the beneficial impact of low gasoline prices and low interest rates.
Manufacturing activity has been modestly weaker since our previous report although the outlook has slightly improved. In a recent survey of manufacturers, a majority noted that production, capacity utilization, and new orders were either at the same level or at lower levels in the second quarter relative to a year ago. Reports from transportation equipment manufacturers were mixed, with several reports of expansions offset by a few facility closures. Manufacturers of mining equipment and related products reported that sales fell short of expectations. Conversely, several manufacturing companies reported capital expenditure and facility expansion plans in the District. The majority of manufacturing contacts expect third-quarter production, capacity utilization, and new orders to increase slightly relative one year ago.
Reports of plans in the District’s service sector have been positive since the previous report. Most contacts reported that sales were either at the same level or higher than one year ago. Despite modest growth, a majority of contacts reported that sales fell short of expectations. Most contacts expect sales to improve in the third quarter.
Residential real estate activity remained strong in most of the District since the previous reporting period. Year-over-year April home sales increased by 29.3 percent in Little Rock, 4.9 percent in Louisville, 7.4 percent in Memphis, and 5.4 percent in St. Louis. Around 90 percent of real estate contacts noted that demand for single-family homes was slightly higher compared with the same time last year and that inventories were slightly lower. Residential construction activity continued to improve moderately. The majority of real estate contacts reported an uptick in new residential construction relative to the same time last year, and many expect a similar increase next quarter.
Commercial real estate activity further improved. The majority contacts indicated that demand for commercial properties across all sectors was slightly higher compared with the same time last year while inventory levels have remained constant. These trends are expected to persist into the third quarter. Commercial construction activity continued to strengthen modestly. Contacts continued to report strength in multifamily speculative building, while some also noted an uptick in the industrial sector.
A survey of District banks showed stable banking conditions across the District. Loan demand remains strong for mortgages and commercial and industrial loans, especially in the Louisville area. Since the beginning of 2016, respondents have reported consistent increases in loan demand for these categories. Loan demand for auto loans was unchanged, while demand for consumer loans was unchanged to slightly lower. Credit standards were unchanged for all loan categories, except for credit cards where they were somewhat tighter. Creditworthiness of business and household applicants was unchanged to somewhat improved.
The District row crop outlook has slightly improved: Corn, cotton, rice, and soybeans were, as of early May, ahead of their respective five-year average levels of planting progress, and crop prices have risen from their lows. However, contacts note that, even with a near-perfect year in the field, most row crop operations will struggle to break even unless a crop price rebound is sustained and significant. District coal production continues to fall, with April production down nearly 40 percent relative to the same month last year and year-to-date production down 33 percent. With the coal extraction environment persistently worsening, contacts report that profits and profit forecasts are moving deeper into negative territory.