July 1, 1983
Reports from the Third District point to further improvement in regional economic conditions in June. The vigorous expansion in the manufacturing sector has continued this month, pushing industrial prices up slightly, and local retailers report double-digit sales growth at area department stores. Loan volume has picked up unexpectedly in June, but deposit growth at area banks has moderated. Real estate sales, however, have slipped and construction activity has levelled off.
Third District businessmen predict continued gains through December. Manufacturers expect the industrial recovery to carry on at a brisk pace at least through year-end. Retail sales are projected to finish the year on a strong note as well, and merchants are beginning to rebuild inventories in preparation for a December surge. Bankers foresee modest improvements in lending activity, with better growth in retail loans but only slowly developing commercial demand.
Real Estate and Construction
Activity in the Third District housing market has backed off a
little in June. Overall sales are still in good shape on a year-
over-year basis, about 25 percent ahead, but many real estate
brokers fear that a recent rise in mortgage rates may have nipped
rising demand in the bud. Rates have climbed 25 to 50 basis points
since mid-May, and that rise has shown up in lighter traffic and
slower sales, particularly of newly constructed units. Third
District construction activity is flat in June and builders say new
starts are not as numerous as earlier in the year.
Manufacturing
Manufacturers responding to the June Business Outlook Survey say
local industrial activity has grown sharply again this month as the
recovery in the manufacturing sector maintains its brisk pace.
Overall business conditions have shown consistently widespread
improvement in each of the last five months, which, according to
survey results, is the most sustained strength exhibited by area
industry in well over five years. Both new orders and shipments have
increased substantially in June and employers have beet hiring
additional workers and lengthening their average workweeks. Stock
levels, however, have been reduced again at area plants.
General activity is expected to show further improvement over the next two quarters. Respondents predict that new orders will play the lead role by climbing considerably, and producer backlogs are likely to increase. Manufacturers also expect to bolster factory payrolls and working hours by December. In addition, increases in capital expenditures are planned by nearly one third of participating businessmen.
Reports of industrial price hikes in June, though still not as widespread as in the late 1970s or early 1980s, are more prevalent than they have been in over a year. Whereas in mid-1982 very few Third District businessmen reported rising prices, one-fourth say they are paying more for raw materials in June than they did in May, and one-sixth report a boost in their own products' prices since last month. Survey results indicate that further increases are likely by the end of the year.
Retail
Department store sales in the Third District have surged ahead in
June, according to retail contacts. Gains in current dollar sales
over a year ago are surprisingly strong this month, hitting double
digits at many retail outlets. In the last six weeks, household
furnishings and other durable goods have been moving especially
well. Merchants cite improved consumer attitudes and favorable
weather conditions as contributing factors in the better-than-anticipated business. Promotional activity, however, also continues
to play an important role in generating sales.
Area retailers are getting bullish in their forecasts and foresee big sales gains in the next six months. Rapidly rowing sales are expected to push December volume 8 percent to 10 percent over fairly strong year-earlier levels. Store operators predict that consumers will spend at least part of their July tax cut and expect rising employment to loosen purse strings even more. By most accounts, a banner Christmas season is in the making and the rosy outlook has prompted many merchants to add to stock levels, albeit cautiously. Inventories are now ahead on a year-over-year basis, and carefully controlled growth is planned for the rest of the year.
Financial
Third District bankers say loan activity edged upward in June.
Commercial lending bounced back after dipping in May but volume is
still only slightly ahead of a year ago. Although demand for
traditional business loans for working capital and inventory
financing remains weak, demand for short-term operating loans has
been strong enough to result in the small and unexpected increase in
overall C&I loan volume. Retail lending has picked up again this
month as well and, according to contacts, volume is now as much as
10 percent above last June. Consistent economic recovery apparently
has buoyed consumer sentiment and increased retail credit demand.
Interest rates, however, remain high relative to historical
standards, keeping consumer lending activity below the levels most
bankers had been hoping for.
Area bankers do not foresee any major changes in present lending trends between now and the end of the year. Modest improvement in consumer loan activity is anticipated as the economy builds steam, but the recovery still has a long way to go before C&I loan demand picks up significantly, lenders say. Corporate capital spending plans are expected to stay soft well into the fourth quarter.
The prime rate at major banks in the Third District is unchanged at 10.5 percent in June. The stickiness in interest rates over the last several months has led local seers to revise their forecasts and most now believe that rates have reached the trough of their cycle. Analysts predict that rates will average slightly higher in the third quarter than in the second quarter, and, by late in the year, expanding credit demands and large deficits are expected to exert further upward pressure.
Deposit flows in the Third District are still healthy but they have softened in June as they did last month. Demand deposits slipped again and now only range from unchanged to 4 percent ahead of last June. Time and savings deposits remain well ahead on a year-over-year basis despite slower growth resulting from reduced activity in MMDAs.