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Beige Book Report: St Louis

March 15, 1995

Summary
The District economy continues to grow, but at a slower pace. Many contacts expect this slowing to continue throughout the year. Nevertheless, the southern parts of the District are still experiencing relatively strong growth. Fewer reports of tight labor markets were noted this period relative to the last several periods. A quarterly survey of small firms indicates that almost one-quarter plan to add employees over the next three months. Residential real estate sales and starts have slowed after posting records in many parts of the District last year. Though loan demand is still generally strong, some pockets of weakness have developed; many District bankers are aggressively seeking retail deposits. Record cotton futures prices have buoyed District cotton producers.

Manufacturing and Other Business Activity
District firms, manufacturers in particular, report mixed
conditions, with slightly more firms announcing consolidations and employment losses than previously. Northeast Arkansas, western Tennessee and northern Mississippi, however, are experiencing strong growth. An aerospace firm in the area recently received approval on a federal contract, enabling it to hire 130 workers this year and at least 500 more next year. An auto parts retailer and distributor reports that its corporate headquarters will move to Memphis this summer, bringing about 800 jobs. Firms in the food processing and household electronics industries will also expand in Memphis over the next few months. Spurred by the prior boom in home construction and sales, a maker of household appliances in southern Indiana added another 500 workers in January to meet demand. A contact in the construction-equipment industry reports strong sales because the earthquake in Kobe, Japan, disrupted the production of four Japanese construction-equipment manufacturers, leaving American firms with less competition.

Although fewer reports of tight labor markets were noted during this period relative to the last several periods, some pockets of tight conditions still exist. For example, a contact in the package delivery business reports that his firm is now offering a hiring bonus for the first time in 10 years to attract workers. Smaller firms in western Tennessee are also reporting difficulties in finding replacements for workers that leave. Much of this sentiment is shown in a recent quarterly National Federation of Independent Businesses (NFIB) survey of 265 District small firms, which found that 23 percent plan to add employees over the next three months, up from 20 percent a year earlier.

Little Rock, southern Illinois and St. Louis are bearing the brunt of consolidations in the District. For instance, a merger will close the corporate headquarters of a St. Louis-based food processor, costing about 450 jobs. A Little Rock producer of medical supplies will move to South Carolina, eliminating 300 jobs. A steel company laid off about 100 southern Illinois employees as part of a cost- cutting program. The overall mood in the District is one of cautious optimism; most contacts continue to see growth in their areas, but at a slower pace. Many also believe that this slowing rate of growth will continue throughout the year.

Inventories
The quarterly NFIB survey found that nearly 19 percent of firms plan to add to their inventories during the next six months, about the same as one year ago, while slightly more than 9 percent of firms plan to decrease their inventory levels. Of those firms planning to add to their inventories, a disproportionate share are in the retail sector, with very few in the wholesale sector.

Real Estate and Construction
Residential construction and sales have slowed from their 1994
record levels in most parts of the District. January building
permits in St. Louis, Memphis, Louisville and Little Rock are down substantially from the same period one year ago. Most contacts continue to cite rising interest rates as the primary cause of this decline. Some parts of western Kentucky, however, report a strong start to 1995 after experiencing declining numbers in the final quarter of last year. Shortages of starter and mid-priced homes are reported in Little Rock and central Kentucky.

Banking and Finance
Most contacts continue to report strong loan demand, although some areas of the District have experienced slowdowns. Commercial loan demand is generally stronger than consumer loan demand. Residential mortgage loan demand is still tapering off. Many banks are aggressively pursuing retail deposits by raising deposit rates on savings accounts and CDs. Some bankers note that funds that were previously leaving banks for mutual funds and other investment
vehicles are being funneled back into deposits.

Agriculture and Natural Resources
Strong domestic demand for cotton and reduced foreign supplies have precipitated record high prices in the futures markets. Several contacts expect cotton prices to stay at relatively high levels throughout most of the summer. This prospect has caused a greater- than-average number of producers to sell forward their 1995 cotton crop. By most estimates, Mid-South cotton producers will increase planted acreage between 10 percent and 15 percent this spring. Elsewhere, Southern pine lumber mills report that orders are running more than 15 percent above last year on a year-to-date basis.