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Beige Book Report: St Louis

August 3, 1994

Summary
District economic activity continues to expand, as firms report sales increases, plant expansions and new hiring. The overall pace of activity, though, has moderated somewhat since the last report because of employee layoffs and firm reorganizations. Residential construction remains strong in most areas of the District, though rising interest rates are dampening activity in some areas. Total loans at a group of small and mid-sized banks continued to increase, though by less than they had earlier in the year. In general, crop conditions are favorable.

Manufacturing and Other Business Activity
District firms continue to report growth, although reports are slightly more mixed than previously. Sales increases were reported by numerous contacts. For example, contacts selling heavy construction-related equipment continue to report very strong demand, resulting in occasional shipping delays of up to eight weeks. In addition, they report that used equipment sales to Mexico have grown substantially since the passage of NAFTA. The upholstered furniture industry in northern Mississippi is booming, with expectations for more of the same. Auto parts manufacturers also report strong demand. In fact, some contracts have been turned down because demand exceeds plant capacity; plant expansions are expected to occur to correct this situation. One brick manufacturer reports a strong backlog and a continued positive outlook; expansion is under way to meet this demand. Hotel industry contacts report that hotels are finally seeing impressive gains in occupancy rates after years of decline, especially at all-suite and full-service properties.

In the southern parts of the District, building supplies companies report that year-over-year sales are up more than 20 percent; year- to-date sales are up 18 percent. A pallet producer reports year-to- date sales are up 15 percent. Other manufacturers report year-to- date sales increases of between 6 percent and 12 percent.

Firms are recalling laid-off workers and hiring additional workers in all parts of the District. For example, a clothing manufacturer in Arkansas recalled 2,000 laid-off workers and reports that plants are operating at capacity. A jeans manufacturer will soon complete a new facility in Kentucky, employing 350 workers, with potential for 250 additional workers if consolidation plans are realized. Northeast Mississippi is getting a new waste recycling facility, generating about 200 new positions. An aerospace firm is transferring production from Utah to an abandoned Mississippi facility, bringing 850 jobs. A nationally known discount store announced the opening of three supercenters in western Tennessee that will employ 1,800 people. An automaker announced it will continue to build a particular model at its current plant, saving 1,100 jobs.

Some employee layoffs, firm reorganizations and sales declines occurred in the District as well. For example, a maker of medical products closed two divisions and laid off 500 workers, about 125 in St. Louis. Riverboat casinos in the St. Louis area have also laid off workers, partly because of the normal overhiring that occurs when they first open and partly because of the lack of traditional slot machines, which reduces attendance and makes the riverboats less competitive. A shoe manufacturer and a chemical company announced plant closings, together eliminating almost 300 jobs. A southern Illinois mining company is closing a mine and a preparation facility by late August, eliminating 200 jobs, because its major customer, wanting a lower-sulfur coal, will not renew its contract. A vehicle transmission manufacturer reports that year-to-date sales are down 13 percent. A contact in the paper products industry reports that year-over-year sales are down 5 percent; however, demand in this industry usually lags the rest of the economy by about one year.

Construction and Real Estate
Residential construction continues to be a source of strength in the District. Single-family housing permits are still significantly above year-ago levels in most areas. Moreover, many areas experiencing strong economic growth, such as central and western Kentucky, report a shortage of available housing. Despite the overall strength, rising interest rates are beginning to affect some markets, like first-time homebuyers. One Little Rock contact described the housing market as brisk, but said the "buying frenzy" appears to be over.

Commercial real estate markets continue to improve. In Memphis, the office vacancy rate is at a six-year low, and industrial construction is headed toward a 10-year peak. Some District contacts expect multifamily construction, which has been dormant for several years, to pick up in the near future.

Banking and Finance
Total loans rose from mid-May to mid-July at a sample of 91 small and mid-sized District banks, but by less than they had increased from mid-March to mid-May. Each major loan category-commercial and industrial, real estate and consumer-showed a similar trend: increasing, but not by as much as during the prior two-month period. Still, District banking contacts report loan demand is strong, and many are expressing concerns about liquidity problems because of inadequate deposit growth.

Agriculture and Natural Resources
Crops are in mostly good condition throughout the District. Moisture conditions vary considerably, however, with some areas needing rainfall, while other areas, especially the southern region of the District, are experiencing excessive precipitation. Contacts in several areas indicate that, unless adverse weather develops, bumper crops are possible. For example, record or near-record cotton and rice crops are expected in Mississippi. Arkansas' rice crop is expected to be largest in several years. The corn and soybean crops appear to be in good-to-excellent shape, with minimal pest problems. Above-average yields appear to have been the rule rather than the exception in most wheat-producing areas this summer. High temperatures in parts of Missouri and Arkansas have reportedly caused above-average poultry losses for some growers. Southern pine lumber mills report that year-to-date orders and production are running about 5 percent above last year.