January 23, 1991
Signs of softening activity were apparent in most sectors of the Third District economy in early January. Manufacturers continued to report declining business and employment. Retailers generally reported flat sales for the Christmas shopping season, in dollar terms. Bankers indicated that commercial and industrial lending was edging down and growth in consumer lending was slackening. Real estate lending remained curtailed and debt restructurings were beginning to reduce outstanding commercial real estate debt.
The outlook is clouded by potential developments in the Persian Gulf crisis, according to business contacts. They are virtually unanimous in citing the situation, however it is resolved, as a depressing influence on their own businesses. Looking beyond the crisis, expectations are that the economic slowdown will last through most of the year and perhaps into early 1992. Manufacturers' overall view of the economy is pessimistic, and they plan to make more cuts in employment and capital spending. Retailers generally expect only a slow improvement in sales beginning late in 1991, and then only if there are clear signs of renewed economic expansion to boost consumer confidence. Bankers expect weak loan demand through most of the year as both businesses and consumers cut spending plans. Bankers also indicated they will continue to limit commercial real estate lending; it appears that debt restructurings in this segment of real estate lending, combined with slow residential activity, will result in a reduction in total real estate loan volume outstanding.
Manufacturing Manufacturing activity in the Third District continued to slip as the new year began. Nearly half of the industrial firms polled in January indicated that business was falling off from December while only one-in-eight noted improvement. Although nondurable goods producers generally were experiencing relatively weaker conditions than durable goods makers, negative reports outnumbered positive indications in every major industry segment except electrical machinery.
Overall, Third District manufacturers said they were continuing to see drops in shipments, new orders, and order backlogs. Employment was also softening, on balance. While half of the firms contacted were maintaining steady employment, one-third were cutting work forces and an equal number were reducing working hours. Industrial prices are apparently responding to the slackness in the manufacturing sector. While a slight majority of area firms reported that they were maintaining steady prices for the goods they make, prices were being reduced by one-out-of-five companies surveyed; and, although nearly one-third noted rising input costs, more than half indicated that the prices of the goods they buy were unchanged from a month ago.
Looking ahead, negative expectations edge out positive views among Third District manufacturers, and the balance of opinion is that the current down trend in industrial activity will continue to midyear. Individual forecasts vary considerably but, overall, managers at area plants expect no growth in either new orders or shipments over the next six months. In response to the dim outlook, local manufacturers plan to trim employment further and they intend to scale back capital spending slightly between now and midsummer.
Retail
Reports from merchants indicate that sales for the Christmas season
ran even with 1989 results, in dollar terms. Some stores made slight
gains and a few fell well below their year-ago performance. Nearly
all store executives contacted for this report said they made
extensive reductions from original selling prices in order to meet
sales targets. As a result, it appears that volume sales goals were
nearly achieved and leftover inventories are not significantly
higher than anticipated.
Store officials said they continue to be extremely cautious in planning for the rest of the year. In their view, near-term prospects depend on developments in the Persian Gulf and their effect on consumer sentiment. Looking somewhat further out, merchants generally do not expect sales to improve until the second half, and then only if the overall economy shows signs of renewed vigor and consumer confidence improves.
Finance
Total loan volume at major Third District banks in late December was
approximately 9 percent above the December 1989 level, with growth
largely due to gains in consumer lending. Commercial and industrial
loan volume was down slightly, year-over-year, and bankers contacted
in January said demand for business loans remained weak. Real estate
loan volume was up from year-earlier levels, but bankers indicated
that outstandings were beginning to decline as a result of payoffs
and commercial real estate loan write-downs while new loan
commitments remain limited. Personal lending in late December was
up, but the gain appeared to be less than the usual seasonal
increase, and bankers indicated that growth appeared to be easing in
early January.
Bankers generally expect weak loan demand throughout the year. They cite the Persian Gulf situation as a restraining influence on the demand for credit; and, looking further ahead, several bankers said they expect an economic slowdown to persist well beyond midyear, further dampening the demand for loans by businesses and consumers.