Former St. Louis Fed economist Michael Pakko discusses current economic conditions in the Eighth District, as published in the Beige Book.
Moderate pace since our previous report. Retail sales are generally up from the previous year, although some weakness has been noted in furniture and auto sales. Manufacturing activity continued to increase, albeit somewhat unevenly. Home sales and residential construction remain weak throughout most of the District, but commercial construction activity remains strong in most areas. Overall lending activity at District banks has remained steady. Contacts report that recent financial market volatility has had little impact on District banks, with problems limited to specific subsectors. Ongoing drought conditions are taking a toll on agriculture in most parts of the District. Crop yields for corn, soybeans, and cotton are all expected to be adversely affected by continuing dry, hot conditions.
Contacts reported that retail sales in July and the first half of August were up 8 percent, on average, over year-earlier levels. About 55 percent of the retailers saw increases in sales, while 32 percent saw decreases. Approximately 63 percent of the retailers noted that sales levels met their expectations, 32 percent reported that sales were lower than anticipated, and 5 percent reported sales above expectations. Jewelry, men's apparel, books, and sofas were strong sellers, while women's apparel and furniture (especially bedroom and dining room items) were moving more slowly. About 56 percent of the contacts noted that inventories were at desired levels. Many of those reporting higher-than-desired inventories plan to use more discounting than usual. The majority of retailers are positive about the sales outlook for September and October, with about 62 percent of contacts expecting sales in those months to increase over 2006 levels.
Car dealers in the District reported that, compared with last year, sales in July and the first half of August were down 6 percent, on average. About 65 percent of the car dealers surveyed reported a decrease in sales, while 27 percent reported an increase. Approximately 35 percent of the respondents reported recent increases in rebates and incentives, while 8 percent reported fewer rebates. About 15 percent reported more rejections of finance applications, but 12 percent of the contacts reported more acceptances. About 27 percent of the car dealers surveyed reported that their inventories were too high (mostly on trucks and SUVs), while the same percentage reported that their inventories were too low (mostly on fuel-efficient and used vehicles). Slightly more than half of the car dealers expect increased sales in September and October; the remaining contacts are divided equally between expectations for unchanged sales and lower sales.
Manufacturing activity has continued to expand since our previous report. However, contacts expressed some concern about future growth. Firms in the fabricated metal manufacturing industry reported plans to hire additional workers. Contacts in the aerospace product and parts manufacturing, nonmetallic mineral products, and the transportation equipment industries reported plans to expand existing facilities and operations. Manufacturing firms in the areas of power transmission equipment, manufactured homes, chemicals, and pharmaceuticals reported plans to open new facilities in the District. Conversely, manufacturing firms in the apparel, electrical equipment, household appliances, motor vehicle parts, and plastics announced that they will close plants in the District. The net impact of these developments is positive, with new and expanded operations more than offsetting cutbacks in other areas.
The District's service sector has continued to expand steadily since our previous report. Contacts in the business support services and educational services industries reported plans to hire additional workers in the District. A firm in the air transportation industry reported plans to expand operations.
Home sales and construction activity have weakened in most parts of the District, although sales in the Louisville area have remained stronger than in other regions. Compared with the same period in 2006, July 2007 year-to-date home sales increased 2 percent in Louisville but declined 2.4 percent in Little Rock, 6.7 percent in St. Louis, and 12 percent in Memphis. Residential construction continued to decline throughout most of the District. June 2007 year-to-date single-family housing permits fell in nearly all metro areas compared with the same period in 2006. Permits declined 26 percent in Memphis, 14 percent in Little Rock, and 10 percent in St. Louis. An exception to the downturn was in Louisville, where permits increased 5.5 percent.
Commercial real estate markets were mixed throughout the District. The second quarter 2007 industrial vacancy rates in Memphis, St. Louis, Louisville, and Little Rock all saw a slight increase over the first quarter of 2007. During the same period, the office vacancy rate increased slightly in Memphis and Louisville and decreased slightly in St. Louis.
A survey of senior loan officers at a sample of District banks showed little change in overall lending activity in the three months ending in July. Credit standards for commercial and industrial loans remained basically unchanged for both large and small firms, while demand for these loans ranged from unchanged to moderately weaker. Credit standards for commercial real estate loans ranged from unchanged to somewhat tightened, while demand for these loans was unchanged. Meanwhile, credit standards for consumer loans remained unchanged, while demand for these loans was moderately weaker. Demand for both prime and nontraditional residential mortgage loans remained unchanged, while credit standards for both types of loans ranged from basically unchanged to slightly tighter.
More recently, while contacts in the banking industry have indicated some concern about financial market volatility, none report any significant impact on their business. Mortgage delinquency rates are up slightly over the past several months but problems appear to be isolated. Credit availability has tightened considerably for non-conforming loans, but agency-eligible loans are experiencing only minor pricing issues.
Drought conditions have worsened in the District since our previous report, especially in western Tennessee. The extremely hot and dry weather has caused soil moisture ratings and pasture conditions to deteriorate since mid-July. Also, a higher percentage of the overall corn, soybean, cotton, and sorghum crops were rated poor or very poor: Between 14 percent and 25 percent of each of those crops obtained poor ratings, compared with 11 percent in July. As of August 1, yields for most crops were expected to be at least 92 percent of last year's yields; however, corn and soybean yields in Kentucky and Tennessee and winter wheat yields (in all states except Mississippi) were expected to be less than 87 percent of last year's yields.