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Eighth District - St. Louis
Beige Book
June 14, 2006

Wednesday, June 14, 2006

Economic activity increased modestly in the Eighth District since our previous report. Both the services and manufacturing sectors expanded. Retail sales were down in April and May compared with a year ago; car sales were down over the same period. Home sales declined in most of the District, while commercial real estate market conditions were mixed. Overall lending activity at a sample of District banks experienced little change in the first quarter of 2006.

Consumer Spending

Contacts reported that retail sales in April and May were down, on average, over year-earlier levels. Approximately 48 percent of the retailers saw increases in sales, while another 48 percent saw decreases. About 39 percent of the retailers surveyed noted that sales levels met their expectations, 48 percent reported sales below expectations, and 13 percent reported sales above expectations. Summer seasonal items, children's clothing, and furniture were all strong sellers, while gift items and higher-end electronics were moving more slowly. Approximately 79 percent of contacts noted that inventories were at desired levels. About 46 percent of contacts expect that summer sales will increase over 2005 levels, and about 33 percent are cautiously optimistic.

Car dealers in the District reported that, compared with last year, sales in April and May were down, on average. About 63 percent of the car dealers surveyed reported a decrease in sales, while 25 percent reported an increase. About 42 percent of the car dealers noted that used car sales had increased relative to new car sales, and 17 percent reported the opposite. One-third reported an increase in low-end vehicle sales relative to high-end vehicle sales, and 13 percent reported the opposite. Nearly 61 percent of the car dealers surveyed reported that their inventories were too high, mostly with new vehicles. About 58 percent of the car dealers surveyed expect sales for the next two months to increase over 2005 levels; about 17 percent of contacts are cautiously optimistic, and about 17 percent expect sales to decrease.

Manufacturing and Other Business Activity

Manufacturing in the Eighth District showed signs of moderate expansion since our previous report. Many manufacturers expressed concern over increasing transportation costs. Contacts in the transportation equipment and furniture industries reported plans to expand operations and hire additional workers. Several small businesses expanded activity. A firm in the auto parts industry reported plans to open a plant in the District next year. In contrast, firms in the household appliance and electrical equipment industries reported plans to close plants in the District by the end of the year. Firms in the fabricated metal product and machinery industries announced plans to lay off workers or relocate outside of the District.

The District's service sector continued to expand steadily in most areas since our previous report. Contacts in the freight transportation, warehousing, and utilities industries reported plans to expand operations in the District. Firms in the rail transportation and business support services industries reported plans to hire additional workers.

Real Estate and Construction

Home sales declined in most of the Eighth District. Compared with the same period in 2005, April year-to-date sales were up 14 percent in Memphis, but fell 6 percent in Little Rock and 1 percent in Louisville and St. Louis. Residential construction continued to slow throughout most of the District. Compared with the same period last year, April year-to-date single-family residential permits declined over 50 percent in Louisville, 13 percent in St. Louis, 4 percent in Memphis, and 1 percent in Little Rock. Permits, however, were up 15 percent in Texarkana, Arkansas, and 22 percent in Jackson, Tennessee.

Commercial real estate market conditions throughout the District were mixed. Compared with the fourth quarter of 2005, the industrial vacancy rate declined in the first quarter of 2006 in St. Louis and Little Rock, but increased in Memphis and in Louisville. During the same period, the office vacancy rate declined in St. Louis and Little Rock, but increased slightly in Memphis and Louisville. Contacts in northeast Arkansas reported that commercial construction activity is very limited, while contacts in northeast Mississippi and south central Arkansas reported that commercial development remains strong.

Banking and Finance

A survey of senior loan officers at a sample of District banks showed little change in overall lending activity in the first quarter of 2006. In this period, credit standards and demand for commercial and industrial loans remained basically unchanged for both large and small firms. During the same period, credit standards for commercial real estate, residential mortgage, and consumer loans remained virtually unchanged. Meanwhile, demand for commercial real estate loans remained virtually unchanged, demand for residential mortgage loans was moderately weaker, and demand for consumer loans ranged from moderately weaker to moderately stronger.

Agriculture and Natural Resources

Planting of the major District crops--corn, soybeans, sorghum, cotton, and rice--is ahead of its 5-year average pace in most areas. Planting of soybeans in Indiana, however, is behind normal pace because of recent rains. Soybean emergence is also behind normal pace in Illinois, Indiana, and Kentucky. The winter wheat harvest has begun in Arkansas and Mississippi. The majority of the District's crops were rated in good condition, although cotton in Arkansas and Missouri was rated mostly in fair or good condition. At least 90 percent of the pastures were rated in at least fair condition in all states except Missouri, where only three-fourths obtained that rating.