November 2, 1994
General Business Conditions
The Fourth District economy continues to perform at a relatively
high level, particularly in the industrial sector, where capacity
constraints are becoming increasingly evident. Substantial price
increases are noted along a broad range of industrial goods, and
there is a general presumption that these cost pressures will soon
be felt in finished goods prices. However, significant price
increases have yet to be realized at the retail level.
Construction is spotty by region, although steel producers note an improvement in structural steel orders. Agricultural conditions are favorable, with record harvests seen in many regions. High crop yields have exerted some downward pressure on prices, but farm revenues are expected to be good.
Manufacturing
Industrial activity in the District remains brisk. Auto-related
industries are operating at a high level, bolstering steel
production. District steel producers also note an improvement in
orders coming from the capital goods industry. Recovery in Europe is
strengthening foreign demand for U S. products. Rising foreign steel
prices and lengthening backlogs from foreign steel producers appear
to be further boosting domestic demand for steel.
A continued acceleration in industrial commodities prices, including steel, resin, a variety of paper products, and chemicals, is being noted, along with increasingly frequent reports of capacity strains and labor shortages in the industrial sector. Although a few firms are hesitating to add permanent staff or capacity, that reluctance appears to have diminished in the past few months No respondents are citing substantial wage pressures, however, and there is little indication that the cost pressures from industrial materials are spilling into finished goods or retail prices.
Consumers
District retailers report some slackening in activity in early
October, although one major discounter said that sales have
quickened since then. The back-to-school sales period (mid-August
through September) was described as good overall, with mid-single-
digit improvements from last year.
Durable goods continue to sell well, especially furniture, appliances, and electronics. Some of the strength in this area is thought to be a lagged response to the strong housing starts earlier in the year that have recently been completed. Slower growth in housing demand and increased reluctance of consumers to take on new debt suggest some softening in this area through the end of the year.
Sales of soft goods have lagged, but are generally expected to strengthen. Sales of apparel, and particularly women's apparel, have been disappointing for District retailers. Although part of the weakness is characterized as cyclical, unseasonably warm weather over much of the Midwest has also temporarily reduced clothing demand.
Early indications suggest that the 1994 holiday sales period will be reasonably strong--retailers expect gains of 5 percent or so for the season compared with 1993. Seasonal hiring is expected to be on par with last year. Although one large discounter reports labor shortages in some locations, District retailers indicate they have not had much difficulty finding part-time employees. Suppliers have been increasingly pressing for price increases, but with little apparent success. The major retailers we contacted indicated little room for price increases, stating that a "brutally" competitive retail environment has kept profit margins razor-thin.
Autos
Sales by Fourth District auto dealers vary from "very good" to "best
ever." Although sales rates have probably eased in October after a
robust September, they continue to improve on a year-over-year
basis. Dealers are once again reporting that shortages of many
popular models have damped sales, but confidence for the 1995 model
year is still quite high.
Price increases on the 1995 models are similar to last year, in the 2 to 5 percent range, although incentives and other price discounting are reduced. Dealers also report only modest gains in parts prices and service charges.
Dealers are increasingly concerned that market interest rates will begin rising again, most immediately because of the impact on their floor-plan costs, and only secondarily because of their effect on consumer loan rates. Consumer finance rates have been stable recently in most markets.
Banking and Credit
District loan demand remains solid, especially for consumers. Real
estate lending has moderated a bit, but is still characterized as
reasonably strong. The most prominent change in the past few months
has been a strengthening in commercial credit demands, particularly
for small and medium-sized businesses. This may reflect rapidly
rising floor-plan financing by auto dealers, although a more general
business expansion is noted. No slippage in loan quality has been
reported. Competition for deposits has intensified, although several
large District banks note a continued run-off of certificates of
deposit. Deposit rates have apparently become increasingly
competitive with nonbank deposit sources.