March 20, 1986
The Third District economy is healthy, on the whole. Business continues to improve in the manufacturing sector, although order backlogs and employment have edged downward slightly in recent weeks. Retail sales in January and February were in line with or above merchants' expectations, and unplanned discounting was minimal. Bankers report continued growth in lending, although not at the rapid rate of increase of early 1985.
The outlook for the next six months is generally positive. Manufacturers expect continued improvement, although they do not foresee any near-term increase in employment. Retailers see no signs of slackening consumer demand, and they are raising their sales forecasts for the first half of the year. Bankers predict steady growth in commercial and consumer loan demand, as well as mortgage lending at current interest rate levels.
Manufacturing
Industrial activity in the Third District is expanding marginally,
according to the latest Business Outlook Survey. Twenty-three
percent of the firms replying to the March survey say their business
has picked up from a month earlier while 13 percent say business is
down. Sixty-four percent of the survey respondents report no change.
Conditions are substantially the same for manufacturers of durable
and nondurable goods.
Third District manufacturers have increased shipments, but made only slight gains in winning new orders; the level of unfilled orders has dropped fractionally. Employment rose at 10 percent of the plants covered by the March survey but declined at 25 percent, thus offsetting last month's slight gain. Prices of industrial goods are steady in the region. More than 80 percent of the companies surveyed report no change in the prices of either goods purchased or goods sold this month.
Optimistic views prevail among the local manufacturers participating in the latest survey. More than 40 percent forecast continued expansion and look forward to increases in new orders and shipments over the next six months; another 40 percent expect a continuation of present conditions. Employment prospects are not as bright, however; most manufacturers surveyed in March do not expect any change in payrolls or working hours between now and autumn.
Retail
Third District retailers say sales during January and February ran
above the same period a year ago. One major department store reports
sales up by nearly 8 percent over January-February 1985, and a
retailer with stores throughout the Third District says an upgrading
of product lines has been very successful. Most products are selling
well, including appliances, which had not been strong performers
during the Christmas shopping season, and stores have not had to
take unanticipated markdowns to maintain post-Christmas sales.
Third District retailers contacted in March have raised their sales forecasts. They expect the strength exhibited by most product lines in January and February to continue. Although sales of spring merchandise have been restrained by cold weather recently, merchants are carrying sizable inventories of these items in anticipation of strong sales once warmer weather takes hold.
Finance
Total loans outstanding at large Third District banks in February
were approximately 10 percent higher than a year earlier. A dip in
commercial and industrial loans outstanding in late January and
early February had been recouped by the beginning of March,
according to lending officers. Third District bankers expect the
current economic expansion to continue throughout 1986, providing
the impetus for growth in business lending of 10 percent or more
during the year.
Commercial leasing has declined substantially. Local bankers do not expect this business to revive unless proposed tax changes, which have negative implications for leasing, are modified, or the date of their implementation is postponed.
Although consumer lending is still moving up, the rate of increase has eased at Third District banks. Automobile manufacturers' incentive financing programs have taken installment lending market share from banks. Growth in credit card loan volume has been slowed by seasonal repayments of credit balances by consumers as well as by more cautious lending by Third District banks in response to rising delinquencies. Mortgage lending is brisk, both for refinancings and home sales.
Third District bank deposits are increasing at about the same rate as they did during 1985, with growth relatively stronger in money market deposit accounts and longer-term CDs. With slower growth in loan portfolios than last year, banks are committing a larger portion of new funds to money market instruments than they did in 1985.
Local bank economists are raising their forecasts of economic growth in response to the drop in oil prices, a depreciating dollar, and a sustained high level of consumer demand. Nevertheless, they do not expect much upward pressure on interest rates until later in the year. Most economists anticipated the recent cuts in the discount rate and prime rate. As for long-term rates, they expect Treasury bonds to remain at 8 to 8.5 percent. Rates are expected to rise by year-end, however, with short term rates up about 30 basis points and long term rates up about 50 basis points.