May 4, 1987
Most sectors of the Third District economy are making only modest gains as the second quarter begins. Manufacturing activity picked up slightly in April after being flat in March. Retail sales, while still growing as April came to a close, have slipped below retailers' plans. Bankers report a fall-off in consumer loan growth but indicate that business lending continues to grow moderately. Although mortgage markets have been upset by the recent run-up in interest rates, realtors say the usual spring surge in home sales does not appear to have been significantly restrained.
Forecasts for the Third District economy vary. Manufacturers expect only steady conditions for the next two quarters. Retailers believe sales for the spring season will be moderately above the same period last year, but they do not have any firm expectations for the second half of the year. Bankers look for continued growth in commercial and industrial lending, but expect further slackening in consumer loan demand. Realtors believe the current pace of home sales will continue through spring unless there are further increases in mortgage rates.
Manufacturing
The April Business Outlook Survey indicates that local industrial
activity is moving up slightly again after a pause in March,
continuing the stop-and-go pattern that has marked 1987 thus far.
Just 20 percent of the manufacturers covered by the April survey are
stepping up operations, while 12 percent are cutting back; two-
thirds are operating at a steady pace. Conditions are similar in
both the durable goads and nondurable goods sectors.
Although there are some positive signs this month, there is no general indication of significant strengthening in the region's industrial sector. New orders and shipments are advancing slightly, but order backlogs are slipping fractionally. Employment is also off a bit; although nearly three-fourths of the firms contacted in April are maintaining steady payrolls, 17 percent are cutting back, and only 10 percent are adding employees.
Industrial prices in the region are mostly stable. Three-fourths of the firms polled in April say input costs are unchanged from last month, and more than 80 percent report steady prices for their own products.
Looking ahead, local manufacturers forecast little change in the pace of business, although manufacturers of nondurable goods are more optimistic than durable goods makers. Overall, survey respondents expecting improvement during the next six months just edge out those anticipating a slowdown, resulting in the lowest net positive forecast since April 1980. On balance, firms participating in this month's survey project only marginal gains in new orders and shipments in the second and third quarters. They also indicate that employment prospects are not good; although half of the survey respondents intend to maintain steady payrolls, companies planning cutbacks exceed those looking to hire more workers by two to one.
Retail
Retailers in the Third District report that sales in April ran
modestly above the same month last year, but several store officials
say the year-to-year increase was slightly below their expectations.
March sales, however were better than expected; thus, most retail
contacts say their overall first quarter (February-April) results
should be good. Sales estimates for this period range from 3 to 10
percent above the year-ago period. Seasonal items, apparel, and
jewelry are selling well; and the relatively higher margins on these
goods are bolstering retailers' profits for the quarter.
Store executives believe the current pace of consumer spending in the region will continue for the next several months, which is as far ahead as they feel confident to forecast. They say continued good performance in the region's retail sector depends on a generally healthy local economy and continued job and population growth in parts of the Third District, such as central and southern New Jersey, where some of the area's major retailers are planning new stores.
Finance
Bank lending in the region, on net, has grown little since the
beginning of the year. Total loan amounts outstanding at major Third
District banks in early April were up just over 1 percent from
December's levels. The slackening growth in total lending is almost
entirely due to a slowdown in consumer loan growth in recent months.
Bankers contacted in late April say that credit card and other
consumer installment loan volume is flat or down compared to 1986
year-end. Although bank credit officers say some of this slowdown is
due to consolidation of personal loans under home equity credit
lines, they believe that total personal lending is growing more
slowly, however it is classified. They say that the long-predicted
retrenchment in consumer spending may have begun, and they expect a
slower rate of retail sales to result in an easing of consumer
credit demand.
Commercial and industrial loan volume at large Third District banks is up around 5 percent from the beginning of the year. Bankers say this rate of growth may slip somewhat in the near term, as the current economic expansion ages, but they expect lending to companies in the region to grow at close to its current pace for the rest of the year.
Real Estate
Residential real estate activity is picking up, as is usual in the
spring, according to realtors. They believe the recent run-up in
mortgage rates will not significantly reduce home sales, although
higher rates may restrain rising home prices. Most realtors in the
region say that sales should continue at a brisk pace as long as
rates do not go much higher.
The average rate on 30-year conventional mortgages in the region has increased from approximately 9 percent in March to over 10 percent in late April. Mortgage lenders say the general increase in bond rates has affected the pricing of mortgage-backed securities, causing them to raise mortgage contract rates. In addition, lenders say, home buyers are more likely to take down mortgages for which they have commitments when rates rise. Consequently, individual lenders seek more funds to be certain of covering mortgages to which they are committed. The aggregate result of this is upward pressure on the cost of funds for the industry as a whole. Nevertheless, there is not a widespread feeling in the region that mortgage rates will continue to rise; one large mortgage lender in particular believes rates will decline to 9-9.5 percent soon and remain in that range for the rest of the year.