June 15, 1988
The Third District economy is continuing to grow in June, although some softness has developed in the consumer sector. Manufacturing activity remained on an upward trend as the month began, with continuing gains in employment noted. Retail sales, however, have been only steady in recent weeks, and retailers say the year-to-year comparison is also flat. Bankers report real estate lending growing at a strong pace, an acceleration in business lending, and slow but steady growth in consumer lending.
The consensus forecast in the Third District business community is for a continuation of current trends. Manufacturers predict more growth over the next six months, at around the current pace, but they say cost and wage pressures will mount. Retailers expect summer doldrums that might extend into fall. Bankers forecast growth in commercial and industrial loans in line with overall economic growth, but they say real estate lending may slacken as commercial development in the region tapers off.
Manufacturing
The Third District industrial sector continues to advance, according
to preliminary results of the June Business Outlook Survey. Among
local manufacturers contacted early in the month, 26 percent said
overall business was moving up while only 7 percent said it was
slower. Makers of durable goods reported stronger business than did
nondurable goods manufacturers, with the latter operating at a
steady pace. On balance, among all surveyed firms, most measures of
business conditions showed improvement: new orders and shipments
were rising and order backlogs were moving up.
Factory employment is continuing on its year-long upward trend this month. Manufacturers say the labor market for basic production workers is tight, but there is no shortage of skilled labor; thus, while they have been able to hire new skilled workers without boosting wages, they have been raising wages at the lower end of the pay scales. Large firms said that while labor market conditions in general have not been pressuring their wage bills, contract COLAs are being triggered by inflation and are likely to increase later this year and next, unless month-to-month increases in the CPI subside.
A negative note in the most recent survey is the continuing increase in reports of higher input costs. With 65 percent of surveyed firms reporting increases in the prices of purchased goods, this index is registering its highest reading since May 1981. Survey respondents expect further increases in costs: 83 percent of the companies polled in early June predict input costs will rise during the second half of the year.
Forecasting general business conditions for the next six months, local firms generally foresee further growth at around the current pace, with gains in both shipments and orders. Overall, area industrial companies are planning moderate increases in employment and capital spending between now and year-end.
Retail
Third District retailers contacted in early June said sales in May
were only even with May of last year, in real terms, and the trend
in recent weeks remains flat. Generally lackluster sales have backed
up inventories to excessive levels, particularly at specialty
stores, according to local merchants, and some describe stocks as
significantly higher than they should be. Sales of home furnishings
are healthy, but women's apparel sales remain weak, and sales of
seasonal items have been poorer than expected, which merchants
attribute to cool, rainy weather. Discounting and promotional
efforts to move both lines are widespread. Most retailers expect
sales in general to remain flat over the summer and they are less
than optimistic for the balance of the year. Many stores have cut
back on orders for fall merchandise.
Despite the slackening trend in sales, store officials say they are having difficulty maintaining adequate staffing levels. With a shortage of qualified applicants for store jobs, wage and training costs are rising.
In order to maintain profit margins in the face of rising dollar costs of imported merchandise, many stores are turning to domestic suppliers, especially for apparel. In other efforts to reduce costs, several retailers plan to close marginal and money-losing stores in the area.
Finance
Loan growth at major Third District banks has been running at a
fairly steady pace of about 10 percent (annual rate) in the last few
months, and bankers contacted in June say growth will probably
accelerate in response to an increase in business loan demand
lately. According to bank lending officers, some of this demand
represents an attempt by borrowers to lock in fixed-rate funds in
anticipation of further hikes in the prime rate; but bankers believe
most of the recent spurt in business loan demand stems from healthy
growth in the regional and national economies. Lending to consumers
is growing steadily, according to area bankers but at a slower rate
than other credit categories.
Real estate lending continues to advance strongly, but bankers say this growth may taper off soon. With growing softness in commercial real estate markets, permanent financing for projects is becoming more difficult to obtain, and area banks generally do not extend loans to developers unless such financing has already been arranged.