December 7, 1994
General Business Conditions The District economy continues to expand vigorously, with virtually all sectors and regions reporting favorable trends. Price pressures continue to be felt in raw industrial materials, but these increases are not being reflected at the retail level. Moreover, wage pressures seem surprisingly light given growing indications of capacity constraints, particularly in the industrial sector. The rise in interest rates has had little measurable influence on either lending activity or consumer demand.
Manufacturing
Industrial activity in the District is operating at a very high
level, with steel and capital goods producers, including auto and
auto-related output, at virtual capacity. Orders backlogs for many
capital goods producers in the District extend well into 1995, and a
major heavy truck producer reports that its 1995 orders book is
nearly full.
Price increases continue to be isolated primarily in the materials industries, such as metals, plastics, chemicals, and paper-related products. Resistance to price increases remains strong at the finished-goods level, however, and industry sources are troubled over narrowing margins. Some labor shortages were noted in specific technical occupations and in some regions, although there are still few reports of any general upward wage pressures. While many firms cited improved hiring plans, most continue to resist adding permanent staff
Retailers
Although retail sales in the District have not been quite as strong
as in other regions of the country, consumer demand began picking up
in November and appears to have been stronger than expected during
the bellwether Thanksgiving weekend. Overall last month, retail
spending improved by mid-single digits from this time last year,
with high single-digit increases posted during the final week of the
month. Furniture and other home goods continued to lead the market
in November, and electronics sales were also comparatively strong.
Retailers say that consumer credit is expanding, a trend confirmed
by District bankers.
Mall traffic was reported to be exceptional over the Thanksgiving weekend. Sales were especially strong for discounters and department stores. Although specialty stores, such as apparel outlets, continue to lag the market, their holiday weekend sales were significantly improved. Price discounting was thought to be a contributing factor.
Retail inventories are reported to be conservative, but satisfactory. Shortages were reported in some areas, but retailers expressed little worry about insufficient stocks. Suppliers of furniture and petrochemical-based products are reported to be pressing for price increases, but retailers indicate that competitive pressures are still restraining force. Prices are apparently failing for many apparel goods and are rising only marginally in most other areas. As in the past several District reports, profit margins in the retail area are thin.
Temporary workers are increasingly hard to find this holiday season, and retailers are aggressively competing for qualified part-time workers. Several respondents noted a large number of help-wanted advertisements, and employment of high school students is reportedly on the rise.
Autos
One observer of regional auto markets described sales in the
District as "humming along," although that pace may have eased a
little recently. Nevertheless, shortages continue for certain
models, particularly minivans and pickup trucks, and many dealers
indicate sales would be stronger if stocks were available. According
to domestic nameplate dealers, price increases on the 1995 models
range from 2 1/2% to about 6%, with little apparent detriment to
sales activity.
Growing parts shortages are being complicated by increasing supplier requests for higher prices. Many parts suppliers have reportedly reached capacity and are unable to meet demand without incurring additional marginal expenses, such as overtime. Prices of raw materials, such as metals and polymers, are also rising, and profit margins in the supply network are compressed.
Automakers are employing a variety of efforts to increase production at existing factories, including three-shift work schedules, capital equipment additions, and production shifts between existing assembly lines. Industry sources agree that these efforts are adding only incrementally to total output, however.
Dealers remain optimistic about 1995 model-year sales and model shortages are expected to ease before spring. Dealer reaction to recent interest-rate increases is focused on their influence on floor-plan costs, although continued rate hikes could reportedly hamper consumer demand.
Banking and Credit
Despite higher interest rates, banks around the District report
continuing strength in loan demand, although lending activity was
clearly mixed by institution. Consumer borrowing is active, with new
auto credit particularly high and revolving credit balances on the
rise. Mortgage credit has fallen off recently due to the usual
seasonal slowdown in home buying and a further reduction in mortgage
refinancing. Commercial and industrial loan demand actually
strengthened a bit in October, according to several District
sources. One bank noted that business borrowing was centered at
medium-sized firms; another source speculated that floor-plan and
other inventory financing arrangements were up sharply.
All of the District sources were concerned about a potential deterioration in loan quality as competition for loans continues to intensify. A few sources have begun to move away from some credit areas due to quality considerations and narrowing margins.