June 25, 1984
Contacts in the Third District say the business environment is still healthy. Although some signs of a weakening of the expansion are appearing. Retailers have posted significant sales growth and bank contacts report continuing healthy increases in both commercial and retail lending. Manufacturers, on the other hand, indicate increases in activity which are softer than those of the first quarter, and real estate contacts have seen a sharp slowdown in sales over the past six weeks.
The outlook for the remainder of 1984 reflects a similar pattern. Retailers and bankers are forecasting strong growth for the rest of the year. Manufacturers anticipate continued growth, but are increasingly less enthusiastic, and realtors foresee a prolonged slump in their industry, barring an unanticipated decline or leveling-off of mortgage rates.
Manufacturing
Respondents to recent Business Outlook Surveys report healthy growth
in manufacturing activity for May and June, although the portion of
respondents reporting increases continues to slip. The June survey
finds 37 percent indicating an increase in activity over May levels
and 8 percent noting a decline. Specific indicators also have posted
less robust increases in June than in May. While new orders and
shipments continue to advance, producer backlogs and delivery dines
are unchanged. Additionally, employment has edged upward only
slightly and inventory levels are just fractionally higher than in
May.
Although respondents are not as enthusiastic as they were in the first quarter, the outlook for Third District manufacturing activity remains bright. Almost half of the manufacturers surveyed predict expansion through the end of 1984, whole only 16 percent foresee a decline. Executives polled expect healthy growth in new orders and shipments, yet predict little change in either employment or inventory levels.
Industrial prices have risen again in June, but, as in May, the percentage of respondents indicating higher prices has fallen—37 percent (compared to May's 42 percent) report paying higher prices this month, while 14 percent (18 percent in May) say they are receiving more for their finished products. The outlook, however, continues to reflect widespread anticipation of hirer prices over the next six months. In June's survey, 77 percent of the respondents are forecasting higher input prices by year-end and 57 percent feel they will be receiving more for their output.
Retail
Third District merchants continue to enjoy excellent sales growth in
mid-June. Retailers report 10-percent to 25-percent increases in May
over year-ago levels, and they expect similar results for June if
sales hold up after Father's Day. The performance is attributed
partly to heavy promotions in May, along with unseasonally hot
weather in early June. The heaviest sellers have been "hot weather"
apparel and appliances, such as fans and air conditioners. Inventory
reports vary, but stock levels generally are said to be a little
heavy, though not enough to warrant extensive markdowns.
Retailers say that a combination of continued strength in consumer demand and extensive promotions will result in strong sales growth for most of the remainder of 1984, and project 8-percent to 20-percent increases in sales over 1983 levels. Some merchants anticipate a definite easing in the general economy and a respective slowdown in retail growth toward the end of the year.
Financial
Third District bankers continue to report significant loan growth in
both the commercial and the retail sectors. C&I activity has been
especially strong in the past six weeks, with contacts indicating
growth between 2 and 3 percent since mid-May. Commercial loans
outstanding are currently running 15 percent to 25 percent above
comparable periods of a year ago. Most bankers also report continued
strength on the retail side. Currently, credit card and general
installment lending are setting the brisk pace, while mortgage
activity has been slowing.
The outlook for loan activity through 1984 is a positive one. Although contacts express mixed views over whether the current increases in C&I loans can be sustained, the majority feel that demand is strong enough to keep loans outstanding 10-to-15 percent higher than year-earlier levels throughout the remainder of 1984. On the consumer side, forecasts are generally positive, although some bankers see rising rates occasionally interfering with otherwise widespread consumer demand for bank credit. Specifically, they note the possibility of "bargain" financing packages offered by auto dealers cutting into the retail lending market.
The prime rate at Third District banks is currently 12-1/2 percent, up from 12 percent six weeks ago. Interest rate forecasts of local bank economists have changed very little since the last report; most contacts foresee gradually, but steadily, increasing rates through the end of the year. The prime is expected to move to 13-1/2 percent and the federal funds rate to 12 percent by the end of the fourth quarter.
Real Estate
Third District real estate activity has slowed considerably since
the beginning of June, according to contacts. Although some realtors
say sales were fairly good through May, one local builder reports
that activity has been flat for the past six weeks. Rising mortgage
interest rates are mentioned as a key factor, if not the only
factor, in causing the slump. Rates on 30-year, 3-point, fixed rate,
conventional mortgages have climbed 50-75 points since late April
and currently range from 14 percent to 14-3/4 percent. Consequently,
about half of all new homebuyers are financing their purchases with
adjustable rate mortgages. Realtors and builders believe that if
mortgage rates fell, or simply held steady, for several months,
activity would pick up. With rates forecast to rise even further,
however, contacts expect the sales drought to continue.