January 28, 1986
Economic conditions in the Third District in January are generally improving. A pickup in manufacturing activity that began last fall is continuing, although factory employment has not benefited from the recant gains. Retail sales for the holiday shopping season showed the expected 3-7 percent improvement over 1984, and profit margins improved as well. According to loan officers at large Third District banks, consumer lending is strong and commercial loan demand is rising after a flat second half in 1985.
Expectations for the first half of 1986 vary. Manufacturers have mostly positive views on overall business conditions; however, they expect employment to be stagnant or even to edge downward in coming months. Retailers forecast a lackluster first half as consumers work off debt. Bankers look for continued economic growth in the region. They expect business loan demand to be strong early in the year and to rise further in the second half.
Manufacturing
Industrial activity in the Third District is expanding, according to
the latest Business Outlook Survey. Thirty-seven percent of the
manufacturers replying to the January survey say they have stepped
up operations while only 11 percent say their business is off.
Manufacturers of both durable and nondurable goods indicate
improvement.
Third District manufacturers report gains in new orders and shipments, but note that employment is only holding steady. Backlogs of unfilled orders are also unchanged. Prices of most industrial goods in the region remain stable. Three-fourths of the manufacturers surveyed say neither input costs nor output prices have changed this month.
Manufacturers are generally optimistic about the first half of 1986, according to the survey. Half of the respondents predict continued growth, and project gains in both new orders and shipments; one- third plan to increase capital expenditures. Prospects for improvement in factory employment remain poor, however; based on responses to the January survey, some workforce cuts are likely to be made over the next six months.
Retail
Third District retailers report that the dollar volume of sales
during the Christmas season ran 3-7 percent higher than in the 1984
season; this improvement should hold up overall performance for
their fiscal fourth quarter, which ends on January 31. 1986. Year-
to-year increases above this average were achieved by specialty
stores selling apparel, toys, and consumer electronics, and by
department stores emphasizing these product lines. Appliances and
other hard-goods were slow sellers due to seasonal factors and a
late-December surge in auto sales, according to retailers. Discounts
and promotional expenses have been in line with plans, and fourth
quarter profit margins are reported to be better than a year ago.
Most Third District retailers contacted in January expect a flat first half in 1986. They believe that debt service requirements will result in a cash drain on households that will adversely affect consumer spending until spring. As evidence of consumer retrenchment they cite the lower than usual ratio of credit-to-total sales in December.
Finance
Total loans outstanding at large Third District banks in December
were 13 percent higher than a year earlier. Despite a pickup as the
year ended, loan demand was generally weak in the second half.
Consumer loan demand remains relatively healthy, although it too was
weaker in the fourth quarter than it had been earlier in the year.
Credit card outstandings posted strong gains, with other consumer
installment lending growing less due to competition from auto
manufacturers' low rate programs.
Commercial and industrial loan volume in December 1985 was about 12 percent higher than the level of December 1984, although virtually all of that growth came in the first half of the year. Third District bankers say demand for business loans is picking up, however, and will probably grow at a 10 percent annual rate during the first half of 1986, possibly faster later in the year. Middle market companies—major commercial customers at Third District banks—are benefiting from good economic conditions in the region, and bankers note improved balance sheets among firms applying for credit.
Local bank economists predict that the pace of economic growth will accelerate during 1986. They foresee some easing of credit demand as manufacturers and retailers work down inventories during the next few months and federal spending is reduced. Under these conditions, the consensus outlook for interest rates is stability for the first quarter of the year and a slight rise beginning by the third quarter.