August 6, 1984
Conditions in the Third District economy are mixed, according to business contacts. Bankers report a surge in savings deposits, and loan demand and retail sales continue strong, though not as strong as in the past few months. On the other side, however, manufacturers report a fractional decline in activity, and real estate contacts see slippage in traffic and sales since June.
Even though current conditions are mixed, forecasts from most sectors are optimistic. Contacts expect growth to continue, though at a somewhat slower pace for the remainder of the year. Realtors expect weak activity until interest rates stabilize, which, they indicate, may happen by year-end.
Manufacturing
Respondents to this month's Business Outlook Survey report a
fractional dip in manufacturing activity, the first in 19 months.
While 14 percent of survey respondents indicate an increase in
activity, 26 percent cite a decline. Even after adjusting for
seasonal factors that tend to restrain activity In July, this
month's results show no growth from June levels. New orders have
fallen, and shipments, inventory levels, and payroll sizes have
shown no improvement since June. This performance represents a
continuation of a general slowing trend which began in April.
Manufacturers' outlook for the rest of the year is bright, however,
as they anticipate continued economic expansion.
Industrial price increases are more widespread in July than in the last few months. Forty-six percent of respondents are paying higher prices in July than in June and 22 percent are receiving more for their output this month compared to June. Higher prices for both inputs and outputs are expected over the rest of the year.
Retail
Retail sales in the Third District are healthy, but exhibit less pep
than they did during the spring and early summer holiday sales. June
sales rose about 15 percent over year-ago levels, but July sales are
about the same as a year ago. Retailers are not concerned, however,
since July 1983 was an exceptionally strong month, and since July is
traditionally a slack time when the industry "cleans out" the summer
merchandise and takes physical inventories. In general, inventories
are a little higher than usual for July, but they are in line with
sales expectations for the coming months. Apparel continues to be a
strong seller due to summer sale promotions. Retailers expect to do
well the rest of the year, predicting growth of 8 or 9 percent on a
year-over-year basis.
Finance
Loan demand remains strong as Third District bankers report
continued growth in both commercial and consumer lending. Commercial
loan activity is increasing but at a slightly slower rate than in
past months, probably due to the "annual summer slowdown." C&I loans
for July are up about 9 percent over June and are running
approximately 20 percent over July 1983. Consumer loans are on the
rise in all product areas, especially credit cards. The only soft
spot in loan demand is mortgage activity, which has turned down as
interest rates have crept up.
Loan demand is expected to remain strong throughout the rest of the year, according to local bankers. Bankers look for increases of 10 percent or higher in C&I loans and 8- to 10-percent growth in consumer lending by the end of this year.
The prime rate, currently at 13 percent at all area banks, was raised from 12.5 percent on June 25. Third District bank economists anticipate slight increases in the prime through the end of the year, to 13.5 or 14 percent, and they also look for the federal funds rate to inch up to 12 percent.
Third District bankers report that retail time and savings deposits are up about 10 percent from this time last year. Time deposits especially are growing, in part because of increases in personal income, and also because of the high cost of holding demand deposits and the relatively low rates being paid on money market deposit accounts.
Real Estate
Real estate sales activity in the Third District has dropped off
slightly since June, and is well below May levels, while traffic has
slowed over 50 percent since June. Realtors explain that July is
traditionally a slow month for the industry, and cite, in addition,
the "high and rising" mortgage rates as a deterrent to buyers.
Thirty-year fixed-rate mortgages are available for 14.5 to 15
percent. Adjustable rate mortgages, negotiable after one year, are
going for as low as 11.9 percent. Real estate contacts observe that
about half of their sales now are being financed by adjustable rate
mortgages.
Realtors are looking for greater stability in interest rates by year-end 1984. They expect stable rates to boost the currently sluggish sales, which, in their view, are due to interest rate uncertainty.