March 16, 1987
Reports from the Third District in March indicate that the regional economy is on an even keel. Manufacturers are operating at a steady rate, while retailers say that business has been good since the beginning of the year; many merchants indicate that sales are currently running above expectations. Automobile dealers report a pickup in sales early in March, after a slow start for the year. Bankers say business loan demand dropped in January but rose in the past month, while consumer lending has been growing steadily since the start of the year, bringing total loan volume outstanding in February about even with year-end 1986.
The consensus outlook in the Third District business community is positive. A majority of manufacturers predict expanding activity over the next six months, although they do not expect increasing orders to outstrip capacity. Retailers expect the current growth of sales to continue through the spring. Automobile dealers also predict continued improvement during the next few months. Bankers expect business loan demand to grow moderately throughout the year, in pace with continued economic expansion. They also expect consumer lending to be strong, with home equity loans adding significantly to growth in this category of credit.
Manufacturing Preliminary results for the March Business Outlook Survey indicate that the gains posted by local industry in February have held, although the pace of activity has leveled off this month. Conditions are similar in both the durable goods and non-durable goods sectors. Overall, one-half of the companies participating in the March survey report no change in the pace of their operations from February, one- fourth indicate improvement, and one-fourth report slower business. Specific measures of industrial activity are mixed, but indicate little change overall. New orders and shipments are up marginally, but order backlogs have eased slightly. Employment is steady.
Industrial prices in the region are generally stable. Over 70 percent of the firms polled in March say both input and output prices are unchanged from February. However, 22 percent report higher charges for the goods they purchase and 13 percent have raised the prices of their own products.
Looking ahead, area manufacturers remain mostly positive, although optimistic sentiment is no more widespread now than it has been for the past year and a half. Forty-four percent of the March survey respondents predict improved business over the next six months and 35 percent expect steady conditions; however, 20 percent anticipate slower business ahead. On balance, survey respondents expect gains in orders and shipments but no change in order backlogs. Local industrial firms' employment and capital spending plans call for little change over the next six months.
Retail
Retailers report that consumer spending has continued at a strong
pace since Christmas. Sales in January and February were above sales
in the same months of last year by more than 10 percent for many
department and specialty stores. Discount stores posted more modest
results. Most product lines are selling well, with apparel doing
best and hard-goods sales relatively slower. Traditional Presidents
Day sales were very successful for most stores. Retailers attribute
the continued strength of sales to the region's healthy economy, but
some merchants speculate that consumer spending may be getting a
temporary boost because many individuals currently have higher take-
home pay than they did late last year due to delays in adjusting
their payroll withholding to the levels required by the new tax law.
Retailers say their first quarter (February-April) should be very good, and they are optimistic that the current growth of sales will continue through spring. However, although their outlook for 1987 as a whole is positive, store officials say there could be a weakening in the second half. Merchants believe that higher tax liabilities will cause more affluent customers to cut back on discretionary spending, and that consumers will hold the line on financed purchases in any case, in order to bring their rising debt under control. In addition, some stores are tightening credit qualifications for their proprietary cards in response to rising delinquency rates, and, according to some retailers, proposed legislation to cap merchant credit card rates will likely result in even more restrictions on store credit.
Automobile dealers say that January and February have been slow, but they are seeing some pickup in sales in early March and are optimistic that sales this spring will be good. Dealers selling domestic cars say they have improved their competitive position against imports due to the dollar's decline, longer warranties on U.S. cars, and low finance rates. They expect manufacturers' financing programs to be a regular part of their marketing strategy from now on.
Finance
Total loan volume at major Third District banks in late February was
about even with the year-end 1986 level, and approximately 13
percent above the level of a year ago. Lending officers say the lack
of growth in total loans in the first two months of the year is due
to an abnormal pattern of business borrowing, resulting from the
movement of some normal January business into December due to
changes in tax law. The drop was recouped in February, however, and
bankers contacted in early March say they expect farther growth in
commercial lending as economic expansion continues. Demand for
fixed-rate business loans, in particular, is growing, and some banks
are accommodating this demand, hedging interest rate risk through
the use of interest rate swaps and financial futures.
Consumer loan volume has been growing at an annual rate of about 10 percent since December. Banks offering home equity credit lines report strong growth in commitments as well as usage, with drawdowns of up to 50 percent. Although consolidation of credit card debt was significant in early use of home equity loans, bankers now say that consumers are using this form of borrowing for new debt, giving consumer installment lending a further boost.