December 5, 1984
The Third District economy is turning in a somewhat mixed performance again in November. On the up side, retailers are starting the holiday season with strong sales, realtors are seeing an increase in traffic, listings, and sales, and consumer lending continues to grow steadily. Less positive are manufacturing, where the expansion continues to lose steam, and business borrowing, which has been flat over the past six weeks.
The overall economic outlook is generally upbeat. Retailers expect to finish the year with a bang, and realtors hope to continue to ride the tide of lower mortgage interest rates. Area bankers predict continued economic expansion and expect commercial loans to pick up again. Growth is expected in manufacturing also, but at a slower rate.
Manufacturing
The rate of expansion in local industry continues to decline,
according to respondents to this month's Business Outlook Survey.
Almost two thirds of the manufacturers polled in November say there
has been no change in the level of business activity compared to
last month. November is typically a slower month, but, even after
adjusting for seasonal effects, this deceleration in growth is still
evident. The slowdown is most pervasive in the durable goods sector
where not one respondent indicated improvement. Producers of
nondurables, on the other hand, are still posting solid gains.
Reports on specific indicators also reflect the apparent leveling off in manufacturing activity. The only indicator to increase in November is shipments; unfilled orders, delivery times, inventories, employee payrolls, and the length of the average workweek all register minuses.
The outlook for manufacturing over the next six months is still positive, but optimism is waning. The proportion of respondents looking for future expansion has been shrinking steadily since mid- 1983 and now stands at 47 percent. Nevertheless, projections of new orders and shipments are still strong, and payrolls and working hours continue on their way up.
Industrial price reports have been marked by stability over the past few months. This month, three out of four executives polled say there has been no change in either prices paid for raw materials or prices received for finished goods. As for the future, however, the same proportion of respondents predict higher costs by April, while about half expect to receive more for their output.
Retail
Retail sales over Thanksgiving weekend were strong, giving an extra
push to what has been an already brisk six-week period. Most retail
contacts feel that consumer confidence is up, citing increases in
credit purchases and a "freewheeling" attitude about spending.
Still, heavy promotional activity is being used to attract shoppers,
and area merchants say they will continue to use the discounting
tactic to boost sales throughout December. Currently, sales volume
is running about 10 percent above last year at this time.
Inventories at Third District department stores are slightly heavier than usual relative to sales, but are in line with sales expectations for the next month. One contact said that the heavy stock levels are a reaction to last year's empty-shelf syndrome, pointing out that retailers want to have enough merchandise to avoid shortages.
Area merchants expect to finish 1984 on a strong note, topping last year's exceptional sales by 10 to 15 percent. In part this is the result of the date of Thanksgiving this year, which provides two extra shopping days compared to last year. Local retailers say that each additional day adds about 1 percent to holiday sales figures on a year-over-year basis.
Automobile sales are very strong in the Third District, up about 25 percent over a year ago. Car dealers also are seeing improved consumer confidence. One contact reports, "people are not buying new cars because they need them but because they want them." The average wait for a now car is three to five weeks.
Finance
Reports on lending remain mixed in the Third District. Commercial
lending has flattened somewhat over the past six weeks but is still
up over last year. Area lenders look for a slight pickup in C&I
loans by year-end 1984 in spite of the usual downward seasonal
pressure. They also anticipate a surge in C&I loan growth in early
1985 in conjunction with continued overall economic expansion.
Consumer loans are growing steadily. On a year-over-year basis, local bankers report increases of 30 percent or more. In the past, credit card operations have been cited as the main source of growth, but auto loans account for a large portion of the pickup in late November. Bankers expect consumers to maintain their spending mood through December of this year. Spending in the first half of 1985, however, may slow down if the ratio of installment credit to personal income, currently about 14.5 percent, reaches or surpasses its 1979 peak of 15 percent.
The prime rate at most local banks has dropped to 11.5 percent as of November 27, and Third District bank economists expect another cut of 25 basis points by the end of the year. Forecasts of declining rates are based on sluggish fourth quarter economic growth and on expectations that the Fed will try to stimulate economic activity. Bankers apparently expect such efforts to be successful and see the prime climbing back up to 11.75 or 12 percent by mid-1985 as a result of renewed growth.
Real Estate
Third District realtors enthusiastically report that traffic,
listings, home prices, and sales are up. Seasonal factors which
usually depress sales in late fall and early winter are being offset
by lower mortgage Interest rates and sonic pent-up demand. Thirty-
year fixed-rate conventional mortgages are available for as low as
12-7/8 percent; 15-year mortgages for 12-1/2 percent. Adjustable
rate mortgages start at 10-3/4 percent and go up to about 13 percent
depending on the terms of the agreement. Although lenders are
pushing ARMs, consumers are flocking to the relatively low fixed-rate loans.