December 6, 1989
Economic activity has continued to slow in the Eighth District in recent months. Manufacturing activity has declined with the transportation sector accounting for most of the slowdown. Construction activity has also been weak. While retailers are optimistic about the holiday season, small businesses are somewhat pessimistic about future economic conditions. Auto sales have weakened considerably. Smaller District banks reported increased third-quarter earnings, while larger banks reported lower earnings.
Consumer Spending
A November 16-21 survey of District general merchandise retailers
indicated considerable variation in recent sales. Most respondents
reported sales gains from a year earlier of 3 percent to 6 percent.
Two respondents, a discount store and a large department store
chain, reported double-digit sales increases. The holiday season
outlook is generally optimistic. Items selling particularly well
include women's apparel, cosmetics, toys and home furnishings. Sales
of durable goods, such as consumer electronics, were mixed. Eighth
District auto sales have weakened considerably in recent months. One
Louisville auto dealer reported October sales of imported vehicles
to be down almost a third from a year earlier. Most dealers believed
weak sales and high inventories will continue into the first quarter
of 1990.
Outlook
A recent survey of small businesses in the Eighth District revealed
rising pessimism regarding future economic conditions. Manufacturers
tended to be more pessimistic than other businesses. Compared with
last year's responses, fewer respondents planned to make major
investments in plant and equipment in the next two quarters. The
survey also revealed a slight easing in labor shortages, as the
proportion of respondents with unfilled job openings dropped to
approximately one-fifth compared with one-fourth a year earlier.
Most openings were for skilled workers. Nevertheless, a larger
proportion of respondents than in the earlier survey planned to
increase average employee compensation.
Manufacturing
Reports suggest that District manufacturing activity declined
slightly in recent months. Producers of electrical equipment,
including home appliances and transportation equipment, experienced
declining orders. Layoffs of motor vehicle assembly plant workers
have continued in recent months both in Louisville, where slowing
truck sales led to temporary layoffs, and in St. Louis, where 3,300
auto workers are scheduled to be idled until late November. The two
plants will cut production again early next year, causing an
indefinite layoff of up to 2,300 workers. Arkansas auto parts
suppliers have also reduced their workforces in recent months.
Construction and Real Estate
Reports indicate that home building in St. Louis, Arkansas and
western Kentucky is weak, with very little construction of multi-
family dwellings. Recently, St. Louis vacancy rates for both office
and industrial space have risen slightly. Construction of a $1.2
billion breakfast cereal plant in Memphis was recently suspended by
a manufacturer that is experiencing slowing sales and falling market
share.
Natural Resources
A damaged lock and dam (L&D) and low water levels have sharply
curtailed commodity movement on the Mississippi River, and the
situation will likely worsen through mid-December. These problems
come at a time when barge traffic has increased due to an unexpected
surge in Soviet corn purchases. Queue times at the damaged L&D are
as much as six days, compared to a normal 10-hour delay. The delays
are forcing some corn exporters to ship from the Ohio River valley,
instead of the Iowa-Illinois area, in order to meet export
contracts. The tie-ups will be exacerbated in early December when
the river will close for about four days as part of a construction
phase for a new L&D that will replace the damaged L&D in 1992.
Industry contacts expect barge traffic to resume at a normal pace by
year-end.
Banking
Most Eighth District banks reported increased third-quarter
earnings. Smaller banks continued to add to their profits primarily
as a result of larger spreads and improved asset quality, while the
District's largest banks saw third-quarter earnings fall. Increasing
problem loans forced District banks to add to their loan loss
reserves, most notably at the larger banks. Large District banks are
now experiencing the effects of overbuilt markets and the
corresponding difficulty faced by developers in meeting their debt
obligations. Continuing problems with commercial real estate
lending, coupled with the continuing loan problems of less developed
countries, are major factors depressing earnings at the District's
largest banks.