March 16, 1987
Summary
The expansion of District non-farm employment slowed in the fourth
quarter, despite faster manufacturing job growth. Construction
activity also decelerated, with a sharp drop in non-residential
building activity. Loan growth at large District banks has been
rapid but recent data indicate a slowing in commercial and real
estate loans. Although crop production declined in 1986 farm income
was flat. The financial position of the region's agricultural banks
improved during 1986.
Employment
District nonagricultural employment grew at a 2.1 percent annual
rate in the fourth quarter, about half its third quarter rate and 1
percentage point less than the national pace. While the goods-producing sectors grew more rapidly in the region than nationally,
service-producing sectors trailed national growth rates. Spurred by
mild weather, District construction employment grew at a 11.2
percent rate in the fourth quarter. District manufacturing grew at a
1.4 percent rate during the period, with gains in non-electrical
machinery, food processing, textile/apparel, and
printing/publishing. Despite these gains, manufacturing employment
remained 0.4 percent below year-ago levels. The fourth quarter
expansion of District manufacturing was constrained by a sharp drop
in Missouri, where losses in motor vehicle production contributed to
the decline. Moreover, while the number of jobs in aircraft
production increased in Missouri last year, the value of federal
prime defense contracts received in the state declined by 27.1
percent in fiscal year 1986, suggesting slower employment growth in
the future.
Construction
The value of District residential construction contracts grew by 4.1
percent in the fourth quarter—similar to the nation's expansion—but
the growth was concentrated entirely in Missouri. Similarly, the
number of residential building permits issued in the District
increased 4.2 percent in 1986 with Missouri again responsible for
the entire gain. While regional single-family permits increased 24
percent last year, permits for multi-family buildings declined 14.2
percent. January residential building activity slowed from year-ago
levels, with single-family permits down 16.7 percent, and multi-family permits off 3.1 percent. The weakness in multi-family
construction reflects overcapacity and changes in the federal tax
code.
The same factors contributed to weakness in non-residential building. December surveys indicate that office vacancy rates in downtown Memphis and St. Louis were above the national average. The value of nonresidential construction contracts declined 9.2 percent in the fourth quarter, following a 15.4 percent increase in the third quarter.
Banking
Total loans outstanding at large District banks continued to
increase over the three most recent months. Spurred by growth in
commercial and real estate loans, total loans expanded at a 20
percent annual rate, more than double that for the same three-month
period last year. Commercial loans advanced at a 23.3 percent rate,
far outpacing the 2.5 percent rate for the equivalent December-
February period last year. A survey of the five largest banks in the
District indicated approximately 5 percent of their December
increase of business loans outstanding was induced by tax reform.
Most of these borrowings, however, were paid-off by mid-February.
Real estate loans grew at a 29.5 percent rate compared with 13.9
percent for the three months ending February 1986.
Agriculture
Final data for 1986 indicate wide variations in crop production and
yields across the District. Despite overall lower crop production
levels, District total net farm income in 1986 should remain at the
same level as in 1985 due to higher livestock profits and increased
government payments. In Tennessee, the value of the state's major
crops was down 29 percent from 1985 and down 36 percent from 1984
due to acreage reductions linked to government farm programs, low
yields caused by early season dryness and falling crop prices. In
contrast, Missouri enjoyed nearly ideal growing conditions that
resulted in a new record corn yield and near-record yields of other
major crops.
The average financial position of agricultural banks in the District, which had declined over the previous three years, appears to have stabilized and improved in 1986. This improvement is evident in third quarter measures of bank profitability, loam defaults, loam delinquencies and bank capital. The number of individual agricultural banks with negative earnings and deficient capital increased slightly, however, indicating a widening dispersion of performance among the institutions.