May 10, 1995
Summary
The pace of District economic activity, while decelerating modestly
in some areas, exhibits few signs of a pending slump. Instead, most
contacts believe the economy has achieved its "soft landing" and do
not foresee a sustained downturn in the near future. New residential
construction is below last year's level, but last year was a record
year in most areas. Commercial construction continues to increase at
a steady pace, as vacancy rates decline and rental rates increase.
Total loans outstanding at large District banks rose modestly during
the past two months, spurred by strong growth in business loans.
Banks continue to compete aggressively for retail CDs as well as
commercial loans, which are being priced below prime by some
institutions. Except for northern portions of the District, the pace
of spring planting is ahead of schedule.
Manufacturing and Other Business Activity
Most contacts continue to report slowing economic activity; they do
not, however, view this as a precursor to a sustained downturn
anytime in the near future. Instead, this slowing is attributed to
the "soft landing" so often reported by the media. Some contacts
still report pockets of tight labor markets, especially for entry-
level and some skilled workers. The consensus is for further growth
in sales and employment, but at a slower pace than previously
experienced.
A contact in the food and beverage industry reports slow, steady growth in sales of about 1 percent over the past quarter. This contact noted, however, that the price of aluminum-a major input-has been rising. Increases in productivity have mitigated this firm's higher costs for the most part, although some cost pass-throughs have occurred in the Midwest One contact in the metal distributing industry reports excellent business through the end of March, but some slowing in April because of price increases. Another contact in the scrap metal industry reports transportation/distribution problems because there were not enough rail cars available to move product to the steel mills.
A firm in the electrical equipment industry that supplies motors to defense contractors reports strong demand, particularly for high horsepower motors, despite uncertainty about future federal defense spending. A contact in the trucking industry reports that business is up about 5 percent over last year. A contact in the public utilities industry reports strong growth in the first quarter, but expects some slowing through the rest of the year. Suppliers to the auto industry are experiencing a slowdown that is being driven by higher car prices and consumers who are awaiting the release of new models of the most popular lines.
Construction and Real Estate
Compared with last year's record pace, residential construction and
sales activity continues to slow in all parts of the District.
Recent year-to-date declines in residential permits ranged from 7
percent in Louisville to 33 percent in Little Rock. In addition, the
average price of homes in many areas is down slightly from one year
ago. In some pockets, like western Kentucky, however, the market is
still strong.
Commercial construction continues its upward trend in the District. There is even talk that speculative building might occur this year in the St Louis and Memphis areas. Many areas have seen office vacancy rates decline and rents increase. For example, the vacancy rate in the St. Louis area has fallen to about 13 percent, its lowest level in 10 years. In Louisville, it fell from 24 percent to 16 percent over the past year.
Banking and Finance
Total loans outstanding at 11 large District banks rose 2.3 percent
between mid-February and mid-April compared with a 1.1 percent
increase during the same period one year ago. A 6.1 percent increase
in commercial and industrial loans outstanding was the major
contributor to the overall increase. Real estate loans also
increased in the two-month period, by 2.1 percent. Consumer loans
outstanding, however, declined by 0.8 percent, compared with a 3.7
percent increase during the same period one year ago. District
contacts continue to report aggressive competition for deposits,
especially retail CDs. On the lending side, competition is
reportedly fierce, and a number of banks are making below-prime rate
loans in an effort to build volume.
Agriculture and Natural Resources
Cold weather and excessive rainfall have slowed the pace of corn
planting in parts of Illinois and northern Missouri. In contrast,
much-needed rains in Mississippi, southern Indiana, southern
Missouri and parts of Kentucky have allowed farmers to resume their
field work, where the pace of corn planting is well ahead of
schedule. The condition of the winter wheat crop looks good to
excellent in nearly all areas. Despite falling slightly in late
March and early April, cotton prices in the Memphis market appear to
be holding above the dollar per pound level. High prices and strong
demand for cotton is expected to boost cotton acreage by more than
10 percent in the Delta region. Lower corn prices and a higher
government set-aside requirement, on the other hand, are expected to
reduce corn acreage by an average of about 5 percent in the
District. Substantial year-over-year increases in fertilizer prices
have occurred for the second spring in a row, increasing total costs
for wheat, corn and rice producers.