June 25, 1985
Economic conditions in the Third District are mixed. Manufacturing activity is basically unchanged in June for the third consecutive month. Retail sales are flat and, for some major stores, below expectations for this time of the year. The financial and real estate sectors are more positive. Both commercial and consumer loan volume at area banks in June is greater than it was at this time last year, but the rate of increase is slowing. Mortgage lending is increasing rapidly, reflecting increased real estate sales. In the agricultural sector, some area farmers are under financial pressure, but overall conditions appear to be better than in other parts of the nation.
On balance, the outlook for the Third District economy, although weaker than it was a few months ago, is still positive. In manufacturing, about 40 percent of the industrial establishments participating in the June Business Outlook Survey anticipate improvement over the next six months. Retail merchants expect a slight improvement in sales between now and the start of the holiday shopping season, despite the present slowdown. Area bankers forecast slower but sustainable growth in commercial lending and a slackening in the growth of consumer credit from its rapid pace earlier this year. Real estate sales and mortgage lending are expected to accelerate as long as interest rates do not rise.
Manufacturing
Manufacturing activity in the Third District remains generally
stable in June for the third month in a row, according to the most
recent Business Outlook Survey. Seventy percent of this month's
survey respondents say there has been no change from May in their
rate of operations; however, the portion reporting a decline (18
percent) exceeded the portion indicating an increase (11 percent)
for the first time since September 1982. The rate of shipments in
June was the same as in May, but new orders dropped marginally,
pulling down producers' backlogs and delivery times. Although
workforces were reduced at one-fifth of the industrial plants
surveyed in June, most survey respondents said their employment was
stable.
In reply to questions about general business activity during the rest of the year, 40 percent of the June survey respondents said they expect present conditions to persist, more than one-third look for improvement, and nearly a quarter expect further deterioration. The outlook for increased employment and capital investment is growing dimmer. The portion of manufacturers scheduling increases in expenditures on new plant and equipment fell to 20 percent of those participating in the survey this month, the lowest level yet this year. Little change in factory employment is likely in the near future. Less than 20 percent of the June survey respondents plan increases in either payrolls or the length of the workweek over the next six months.
Retail
Retail sales have been flat in the Third District over the past two
months. Local merchants say there has been no increase in sales in
either May or June compared to April. Sales volume is also unchanged
compared to the same period last year. Sales of home goods and
higher priced items have been particularly weak.
Cautiously optimistic is the term store managers use to describe their short-term outlook. For the months remaining until the Christmas shopping season, retail sales are generally expected to post gains of 5 percent or more above year-earlier periods, with the most optimistic retailer forecasting a 10 percent increase. Lower interest rates and the faster pace of income tax refunds are cited as factors tending to boost consumer spending.
Finance
Borrowing in the Third District remains strong, with both business
and consumer loans up substantially from a year ago. Consumer loan
volume is approximately 25-30 percent higher than it was in June
1984, with credit card and automobile loans accounting for most of
the increase. Commercial and industrial loan volume at Third
District banks in early June is approximately 17 percent higher than
it was twelve months ago. Business borrowing is likely to ease off
in coming months, however; many borrowers have been able to improve
their balance sheets recently and are likely to have less need for
borrowed funds. Lending officers see economic growth tapering off
further over the summer, resulting in year-over-year increases of
about 10 percent in commercial loan volume.
Mortgage lenders report large increases in the demand for housing finance in recent weeks, with outstanding mortgage volume up 14-20 percent from last year at commercial banks. A major thrift institution in the Third District is receiving one-third more mortgage applications this spring than last, and reports the dollar volume of new mortgages made this April to be three times greater than that in April 1984. The average rate on conventional, fixed- rate 30-year mortgages is 12 percent in mid-June. Falling mortgage rates appear to be the major force behind the boom in housing demand, offsetting any downward pressure stemming from concern over the effect of proposed tax changes on the cost of home ownership.
Third District banks lowered their prime rate to 9.5 percent on June 18. Some local bank economists feel interest rates in general will drop further in the short-run, but they expect higher interest rates later in the year. The consensus of their forecasts is a prime rate of 11 percent by December, federal funds above 8 percent and Treasury bills and bonds at about 8 and 11 percent, respectively. Consumer loan rates are expected to fall in the immediate future and then parallel the movement of other rates.
Agriculture
The financial and market conditions of the Third District
agricultural sector are not as critical as in other areas of the
country. Farms in the Third District are not as highly leveraged as
farms elsewhere, and farmland prices have not declined
substantially.
Dairy farming is the weakest of the District's agricultural industries, as the end of the federal diversion program and reduction of the milk price support have contributed to lower dairy prices and incomes. Other important farm products face better markets. Poultry sales are expected to increase during the rest of the year, with prices remaining stable. Income from fruit and vegetable products in the region this year should meet or exceed the level of last year if prices hold at current levels.