May 6, 1986
The Third District economy appears to be generally healthy in April. Retail sales, except for automobiles, have been strong, and bankers report that overall loan growth in the first quarter was not as fast-paced as last year, but still good. Mortgage lending is surging due to both refinancings and sales. The manufacturing sector is holding steady, although order backlogs have dropped and employment has declined.
The outlook in the Third District business community is for steady or improving conditions in the near term. Manufacturers expect business to improve, but they do not foresee gains in employment. Retailers expect current strong department store sales to continue into the summer. Bankers anticipate steady growth in commercial and industrial loan demand, but believe that growth in consumer loans will depend on further interest rate reductions.
Manufacturing Manufacturing activity in the third District is steady, according to the latest Business Outlook Survey. Of the industrial firms surveyed in April, 71 percent report no change in the pace of their business compared to March, 11 percent say business improved, and 16 percent indicate declining activity. Nondurable goods producers appear to be doing slightly better than producers of durable goods.
Most measures of industrial activity eased in April. Shipments increased, but new orders leveled off, pulling down backlogs of unfilled orders. Factory employment fell as well; one-third of the companies contacted for the April survey reported payroll cuts, while just 12 percent added to workforces. Prices of industrial goods in the region are stable. Mare than three-fourths of the survey respondents reported no change in the prices of either the goods they purchase or the products they sell.
Despite this month's pause in growth, Third District manufacturers are optimistic about the future. In their outlook for the next six months, over 40 percent of the firms participating in the April survey expect a pickup in new orders and a matching increase in shipments. Employment, however, may decline; although half of the firms polled intend to maintain current payrolls, 30 percent expect to reduce workforces. The rate of capital spending by manufacturers in the region is expected to show little change over the next six months.
Retail
Third District retailers say recent sales trends have been good.
Department store officials report that February and March sales were
above year-ago levels by healthy amounts--more than 10 percent for
some stores. Discount store sales have been better than expected.
Some of this improvement is attributed to growing sales of
appliances and home furnishings coincident with more house sales in
recent months. Clothing and children's items are also mentioned as
particularly strong areas. Automobile sales have fallen, and dealers
say a rebound is unlikely in the absence of even greater
manufacturers' incentives.
Although household debt is high by historical standards, Third District merchants believe that consumers are in sufficiently good financial condition to continue the current rate of spending into the summer. They expect sales to be buoyed by rising real income, lower finance charges, and improved cash flow as mortgages are refinanced at lower interest rates. Further gains in sales of appliances, furniture, and home furnishings are expected in the wake of continued strength in the honing market.
Finance
Total loan volume outstanding at major Third District banks in early
April was approximately 13 percent higher than a year earlier. In
commercial lending, the retail and services sectors account for a
major share of new loans at this time because financing needs are
growing as business expands. Loan demand in the manufacturing sector
is not as strong, and bankers note a fall-off in equipment financing
as manufacturers postpone capital spending commitments while changes
in rules on depreciation and investment tax credits are being
considered by Congress. Lending officers expect overall C&I loan
demand to remain strong and say that the current 10-14 percent
annual growth rate is sustainable.
Real estate and construction loan volume is above year-ago levels at Third District financial institutions. Residential mortgage refinancing activity is brisk, as is mortgage lending for house sales. Bankers say they are continuing to lend for commercial and residential construction to developers with successful records and substantial financial resources, although concern is growing about possible increases in office vacancy rates later in the year.
Third District bankers report that consumer lending is growing, but at only about half the rate at which it started the year. The large amount of financing supplied by automobile manufacturers in recent months is cited as one factor in this slowdown, but area bankers generally report a substantial drop in the growth of credit card balances as well. Some banks have had no increase in credit card outstandings since March. Lending officers and bank economists do not think that consumers have reached their debt limits; they believe that consumers may be delaying credit purchases in anticipation of interest rate reductions.
Most Third District banks cut their prime rate to 8.5 percent in late April. Commercial bank economists think that the prime rate will stay at this level for the rest of the year. As for other interest rates, most bank forecasts call for a drop of 25-50 basis points along the yield curve during the second quarter, followed by rising rates as the economy and inflation accelerate in the second half of the year.