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Beige Book Report: St Louis

June 19, 1996

Summary
The pace of economic activity in the District continues to pick up from the more sluggish levels noted earlier in the year. District retailers and auto dealers report recent sales activity at or above last year's levels, and most contacts are optimistic about sales prospects over the summer. Contacts remain concerned about tight labor markets and the shortage of entry-level and certain skilled workers. Residential construction has expanded significantly in most parts of the District, while nonresidential construction has slowed somewhat in a few areas. Loans outstanding at large District banks have declined during the past two months. District crops are in mostly good condition, although spring planting in some areas remains well behind last year's pace.

Consumer Spending
Most retailers surveyed report that recent sales are at or above last year's levels. Almost half of the respondents indicate that sales exceeded expectations. Most also anticipate a modest or significant increase in this summer's sales over last year's, primarily because of expected increases in tourism. Some retailers in St. Louis, however, are less optimistic about summer sales because of the strike against McDonnell Douglas by about 6,700 union machinists. Although some retailers in Arkansas anticipate price increases this fall, most expect no price changes and have no plans to use heavy discounting to move merchandise.

Many District auto dealers report recent increases in sales levels; however, some Louisville dealers report a slight decline in April sales. Almost half of the surveyed dealers have been using rebates and other incentives more than usual, and some St. Louis and Memphis contacts credit these programs for their recent sales increases. Although a few contacts have noticed that consumers are purchasing used rather than new cars, other dealers report no significant substitution. Most surveyed dealers anticipate this year's sales to be the same or better than last year's.

Manufacturing and Other Business Activity
Reports from District contacts continue to be generally upbeat. The general tone of comments is that while the economy continues to grow at a steady pace, there is a growing concern about labor shortages. One contact reports fast-food establishments offering starting wages well above the minimum wage and signing bonuses of up to $250 to attract employees. The majority of contacts note that construction and other skilled trade workers are the most difficult to find. "Poaching"-one company luring workers away from another-has been used by numerous District firms, particularly retailers, contacts also report.

Many firms, especially in the southern parts of the District, report slight declines in last month's and year-to-date sales levels over the same period last year. A representative from a textile company, however, reports that sales are up strongly over last year and are expected to continue on this path. Many contacts report that their inventories are too high and plan to cut prices to reduce stocks. A National Federation of Independent Business (NFIB) survey of District firms in May, though, found that one-fifth of surveyed firms plan to increase their inventories during the next six months; about one-sixth plan to cut inventories. Many contacts also report that, in most cases, they still cannot pass along increased materials' prices to consumers because of competition. According to the NFIB survey, however, about one-fourth of the respondents have increased prices over the past three months, and about one-fifth plan to increase them in the next three months.

Real Estate and Construction
The number of residential construction permits issued in April in most District metropolitan areas increased significantly. Eight of the District's 12 metro areas saw monthly permits increase by as much as 65 percent. Year-to-date permits are up in 10 District metro areas. Some areas especially southern Illinois and Arkansas, are experiencing a shortage of mid-priced homes ($100,000 to $150,000). Nonresidential construction seems to have slowed in a few areas, particularly western Tennessee and Arkansas.

Banking and Finance
Total loans outstanding at 11 large District banks declined 2.9 percent from early April through late May after rising 3.6 percent from early February through late March. Real estate loans, which comprise about two-fifths of the banks' loans, experienced the sharpest decline; they fell 4.6 percent in April and May after rising 6.2 percent in February and March. Business and consumer loans dropped 2.1 percent and 1 percent, respectively, after increases of 0.9 percent and 3.4 percent, respectively.

Agriculture and Natural Resources
Crops are generally in good condition, except in extreme northern portions of the District, which have seen an unusually cold, wet spring. Increased input prices are the rule rather than the exception this year. Besides the uptick in energy prices, fertilizer prices are holding firm at last year's high levels. Some livestock and catfish producers note that increased grain prices are having an adverse effect on their access to credit because of an expected decline in profits. Land prices are reportedly rising in parts of Arkansas and western Tennessee. Southern pine lumber mills report that timber prices have fallen recently because of an excess inventory of saw logs. Activity at lumber mills is reportedly running below last year's pace.