August 5, 1986
Overview
Business conditions are steady or improving for major sectors of the
Third District economy. Manufacturing activity edged up in July,
following three level months. Retail sales in June and July
generally met merchants' expectations of 5-10 percent year-over-year
growth. Automobile sales increased also. Total loan volume at large
Third District banks in June was above the level of June 1985, but
growth during the month was slow.
Expectations for the Third District economy are generally positive. More than half of the industrial firms contacted for the July Business Outlook Survey anticipate improved conditions over the next six months. Retailers say the summer selling season, which went well, is essentially over; they are preparing for the fall, and are holding to their earlier forecasts for a good year as a whole. Commercial bankers believe the Third District economy is fundamentally healthy, and they expect moderate loan growth during the rest of the year.
Manufacturing
Manufacturing activity in the Third District has picked up
marginally, following a three month lull. Among industrial firms
polled for the July Business Outlook Survey, 25 percent reported
increased business since June while only 16 percent noted a
slowdown; 49 percent indicated no change. Nondurable goods producers
reported somewhat better conditions than did makers of durable
goods.
Specific measures of industrial activity for July were mixed, but indicate some improvement, on balance. New orders and shipments were up fractionally, but order backlogs were unchanged. Employment in the manufacturing sector was also steady, and working hours edged up. Prices of industrial goods in the region are stable. Eighty percent of the July survey respondents say neither input costs nor output prices have changed since June.
Third District manufacturers have positive views of the future, on the whole. More than half of the companies participating in the July survey predict better business conditions over the next six months while 20 percent expect a slowdown. Survey respondents forecast gains in new orders and shipments, but anticipate an essentially stable employment situation, with steady payrolls and a slight upturn in working hours. Local manufacturers plan some increases in capital spending for the next six months.
Retail
Third District retailers generally report good conditions.
Department store and general merchandise sales met plans in June,
with increases in the range of 5-10 percent above June 1985. Sales
have been holding up in July, which retailers say is often a slow
month. Merchants say seasonal goods have sold well, and they
attribute this to several weeks of hot, dry weather. Sales of
clothing and furniture are also strong. Automobile sales have picked
up in recent weeks, but do not appear to be exceeding the sales rate
in the comparable period of last year.
Third District retailers expect the usual lull in August, but are looking for further growth in sales in the fall season. Some major store chains expect to finish the year with record sales and gains over 1985 near 10 percent. However, competition among discount stores is increasing as national chains expand their presence in the District; and some merchants say that profit margins are contracting slightly.
Finance
Reports from major Third District banks indicate that the total
volume of loans outstanding in June was approximately 16 percent
above the level of June 1985. Since May, however, loans have grown
at only a 4 percent annual rate. Growth has bean weakest in the
commercial and industrial sector, mainly as a result of efforts on
the part of the banks' themselves. Some Third District bankers say
they have retrenched in this category in order to maintain loan
quality as demand for funds from more creditworthy borrowers
slackens. In addition, some bankers have reduced the extent of their
participation in national credits as net interest margins on these
loans have narrowed and reduced their profitability.
Consumer lending is moving up at about the same pace as it has since the start of the year, but Third District bankers say this momentum may have been maintained by the marketing of low rate (9-10 percent) loans by some banks. These promotional rates were discontinued in July, and bankers expect slower growth in consumer lending for the balance of the year.
Real estate and construction lending slowed somewhat in June, but was still nearly 10 percent above June 1985. Construction lending is still strong although some industry contacts say the pace of building is slowing due to concern over anticipated tax changes. Mortgage lenders say they are still working on backlogs, although the pace of new applications has slowed in recent weeks.
Total deposits at large Third District banks in June were up approximately 10 percent from a year ago. The narrowing spread between rates paid on passbook savings and market-related rate accounts is becoming a matter of concern among local bankers. Some say they are beginning to think about possibly reducing passbook rates in order to maintain the customary differential.
Agriculture
With the exception of farms in Delaware, and especially those in the
southern half of the state, the agricultural sector of the Third
District economy is generally healthy at this time. Dairy,
livestock, and poultry farmers in Pennsylvania and New Jersey are
holding their own, with profit margins widening as a result of
stronger prices and lower feed costs. Dry weather still prevails in
most parts of the area, but recent rainfall saved some crops from
failure.
Cattle and hog farmers in the area have seen prices rise in the last few months, probably by enough to offset lower production and give total revenues a boost. The dairy industry is holding steady, with June production by Pennsylvania farmers 2 percent higher than a year ago and at an all-time high; however, milk prices are down about 5 percent over that time. Poultry farmers are also posting gains, benefiting both from lower feed grain costs and higher prices for both eggs and broilers.
Most of the District experienced very dry weather in May and June, and, although wheat and barley crops were doing well, corn and soybeans were at a critical stage, and the second cutting of hay was reported to be short. Heavy rain arrived in mid-July, however, and prospects for field crop harvests in Pennsylvania and New Jersey are improved. Fruit and vegetable farmers in South Jersey report higher prices for their products, partly as a result of the crisis in the Southeast. Most fruit and vegetable farms in the area are irrigated and did not suffer from the earlier dry weather, and production, while not reaching last year's levels, should still be high.
Crop farmers in Delaware, especially southern Delaware, are reported to be experiencing drought conditions. Losses are expected to exceed 30 percent of projected crop yields, in some cases by a wide margin. Livestock farmers are in distress because they have little or no pasture left.