January 22, 1992
Economic activity in the Third District appeared to be steady in
late December and early January, based on reports from major
business sectors. Manufacturers generally indicated that business
was steady although some firms were trimming working hours. For most
retailers, Christmas season sales were even with the prior year in
current dollars.
This was below expectations, and many stores were
holding special January sales to reduce inventories. Bankers
reported that loan demand remained essentially flat except for a
surge in mortgage refinancing applications in recent weeks as
interest rates fell.
Third District business contacts generally foresee some improvement later in the year. Manufacturers expect the pace of orders to pick up over the next six months. On balance, they are planning to add to payrolls and boost capital spending by midyear. Retailers anticipate a somewhat better sales picture, but not before the third quarter. Bankers are also looking to the second half for improvement; they expect a modest upturn in business and consumer lending to get underway then, although some believe residential mortgage activity could post healthy gains this spring with an increase in home sales.
Manufacturing
Reports from Third District manufacturers in early January were
mixed, but on balance suggested that industrial activity was running
at a steady pace. While shipments were moving up, area firms
indicated that new orders were being received at just a level rate.
Manufacturers gave mixed reports on inventories although it appeared
that, on net, stocks were edging down. While employment was
practically steady, according to a majority of companies contacted,
one-fourth noted recent reductions in working hours. Nearly all
manufacturers said prices for both inputs and the products they make
were holding steady.
Looking ahead, about three-fourths of manufacturers contacted for this report expect business to improve by midyear, and the rest were about evenly divided between those anticipating steady business and those expecting a decline. Overall, manufacturers look for an increase in orders to boost backlogs and lead to some further reduction in inventories over the next six months. In tine with this forecast, industrial firms in the Third District are planning to extend working hours and increase payrolls slightly. They are also scheduling some increases its capital spending for the first half of the year.
Retail
Most Third District retailers contacted for this report indicated
that sales for the Christmas season were below their expectations.
On average, sales were approximately even with 1990 in current
dollar terms. Mass merchandisers and department stores generally saw
sales slip marginally from 1990 levels while discounters and some
specialty stores (especially mid-priced jewelry and apparel stores)
posted gains. Nearly all types of stores were making further price
cuts on a broad range of goods in January to reduce excessive
inventories, and most merchants said that the pace of sales in the
first week of the month was fairly steady. Store officials generally
expect January sales to exceed the low levels of January 1991, but
most expect the current November-January fiscal quarter results to
just match the year-ago period in current dollars.
Most retailers expect sales to remain slow at least until midyear. They hope that improving overall economic activity by that time will boost consumer confidence and lead to healthier sales. Nevertheless, many retail contacts do not expect a strong upward trend in consumption spending to develop. Expecting little short-term improvement in demand, and concerned that competitive pressures due to over-capacity will continue, store executives do not anticipate significant increases in revenues. Instead, many indicate they will be looking to improve operating efficiencies in order to bolster profit margins.
Finance
Most Third District bankers contacted in early January said loan
demand remained soft except for a surge in applications for mortgage
refinancings. Although there were a few reports of slight upturns in
home purchase mortgages, mainly for lower-priced homes, real estate
loans outstanding at major banks in the Third District continued to
trend down. Bankers also described demand for consumer installment
credit as flat to slightly down in recent weeks. Bankers generally
reported a similar trend for commercial and industrial loans.
On the whole, Third District bankers expect a gradual improvement in the economy and a slow pickup in lending to get underway around midyear. Bank lending officers said the recent decrease in interest rates will make debt service more manageable for business borrowers with floating-rate loans, leading to some improvement in credit quality for both current and potential borrowers; but bank lending officers generally do not expect the lower rates to prompt a significant upturn in demand for commercial and industrial credit. Some bankers said they expect increased homes sales in the spring to boost mortgage demand.