May 5, 1993
Summary
District business activity continues to expand, but with apparently
greater growth in production than in consumption. Retail sales
increased at a much slower pace in March and April than in the
previous two months, particularly for automobiles and apparel.
Severe weather in mid-March contributed to the mediocre performance,
but retailers also point to consumer caution about the future course
of the economy as an underlying factor. Manufacturers continue to
report strength in orders, backlogs, and production. Producers of
steel, heavy truck components, and many types of capital goods
indicate near-capacity operations. Most of the higher production
schedules are being met through productivity gains and overtime, but
a few respondents report hiring a limited number of additional
workers in order to accommodate a rising backlog. Financial
institutions cite a moderate increase in overall loan activity,
mostly as a result of refinancing both home mortgages and existing
business loans.
Consumer Spending
Fourth District retailers report that sales growth has fallen off
the pace set during the first two months of the year. Traffic in
March and April has been relatively slow for this time of year, and
sales have been flat. Many respondents blame unseasonable weather,
pointing specifically to the mid-March blizzard. Even the positive
influence of an early Easter could not offset the storm's
devastating effects on consumer spending. While most retailers agree
that better weather will revive consumer activity, they still
express concern that consumer confidence may remain subdued by the
slow pace of the areas economic recovery. The lackluster sale of
big-ticket items, such as motor vehicles, reflects consumers'
caution. Even with low interest rates and ample credit available,
dealers expect a modest 5 percent year-over-year improvement during
the remainder of the all-important spring selling season. Apparel
retailers mention that they may discount spring/summer seasonal
items a little earlier than usual, but most respondents are
comfortable with their current inventory levels.
Manufacturing
A growing number of manufacturers report new orders and backlogs.
They uniformly estimate further increases in production this quarter
over last and believe that they have ample capacity to accommodate
higher production schedules. Some of the tightest conditions are
reported by the steel industry: Operating rates range between the
low 80s for some specialty producers and near capacity for producers
of flat rolled steel. The high operating rates and full order books
have sustained a general price increase for many steel items.
However, some producers report that orders for future delivery have
slowed in recent weeks, making further price increases less likely.
Producers of truck components also report near-capacity operations, as new orders in March again exceeded expectations. Backlogs continue to climb rapidly, and heavy-duty truck production for 1993 now appears to be running at a rate close to the previous peak year in 1988. Stronger-than-expected demand for some automobile and light truck models and options has strained capacity and created bottlenecks at a few Big Three parts and assembly plants.
Producers of capital goods and special industrial and telecommunications equipment also cite better-than-expected orders and backlogs last quarter. For example, a manufacturer of equipment for depository institutions reports sizable increases in orders so far this year relative to last year, resulting in an additional shift at one plant. Some consumer goods producers also note a step- up in sales and production since late 1992. Sales of vacuum cleaners rose at a double-digit rate last quarter, and output of major household appliances held at about the previous quarter's level. For machine tools, however, orders continue on an irregularly rising trend because of further weakness in the aerospace and commercial aircraft industries.
Employment
Manufacturers in the District continue to stress that they can meet
rising production schedules over the next several months without
resorting to significant employment increases. Despite higher
backlogs and operating rates at the end of last quarter, producers
of truck components, depository institution equipment, industrial
supplies, and steel expect few, if any, new hires or employee
recalls. Some believe that their higher production schedules can be
met through productivity gains and overtime, and a few are relying
on outside contractors. Several producers emphasize that their long-
term goal continues to be greater productivity per unit of sales and
output and are cautious about hiring in response to short-run rises
in demand, in light of high employee benefits costs. Yet, some
respondents report limited gains in payrolls. A capital goods
producer, now operating some of its lines at capacity, plans to hire
in order to accommodate a rising backlog. In addition, selected auto
assembly and parts facilities report hiring additional workers,
although they stress that new employment is the last resort after
overtime has been exhausted.
Retailers expect only replacement hiring at this time, as they anticipate increased productivity and overtime hours to accommodate sales growth in the near term.
Financial Developments
Rising loan activity continues to be concentrated in home equity and
mortgage loans. Several lenders report that the volume of mortgage
refinancing is still virtually at capacity, although the pace of
increase has leveled off at some banks. A large thrift, however, has
experienced what may be another record month for refinancing. For
new mortgage loans, a few depositories note a somewhat more than
seasonal pickup in April, but most thrifts and banks indicate less
than usual strength. Some banks, particularly larger ones, report a
slight increase in business loans, which is aided primarily by a
strong demand to refinance existing loans.
Several large banks state that savings deposits, especially certificates of deposit, fell sharply again in April, with some indicating a bigger decline than in March. A few large and mid-sized thrift institutions, however, report that aggressive pricing and marketing programs have generated growth in their deposits in April.