September 20, 1989
Overall economic activity in the Third District is advancing modestly in September, although the manufacturing sector continues to soften, with area industrial firms reporting declining business activity edging out those indicating improvement for the third month in a row. Retailers, however, report moderate growth in line with expectations, and auto sales picked up in August as manufacturers offered more generous incentives. Banks benefited from improved auto sales in the consumer lending area, while the growth of business lending has slackened. Real estate lending remains on a strong upward trend.
Third District business contacts generally foresee a continuation of current trends. Manufacturers predict some further declines in business over the next six months. Retailers expect sales to grow at about their current pace but they are being cautious in their planning for the fall and winter. Bankers anticipate slower growth in lending of all kinds during the rest of the year as a result of the slower economic activity they forecast, as well as the more stringent credit standards they are implementing.
Manufacturing
Third District manufacturing activity continued to slow in August
and early September, according to firms contacted for this report,
as the region's goods-producing sector experienced a third
consecutive month of slowing business. Overall, while about half the
companies surveyed indicated they were maintaining steady
operations, nearly one-third said they were experiencing a drop in
activity. Durable goods producers, particularly those in heavy
manufacturing industries, indicated the sharpest drop in activity
while nondurable manufacturers generally reported steady or
improving business conditions.
On balance, area firms were stepping up shipments in August and September, but they were obtaining new orders at just a steady rate, leading to a drop in order backlogs. Employment also showed some weakness, as area firms were reducing both payrolls and working hours; many firms that had been running double shifts have now pared second shift hours. Industrial contacts noted continued slackening in the pace of price increases for both inputs and outputs.
Looking ahead, managers at area plants generally expect a further decline in business. Among firms polled for this report, pessimistic forecasts for the next six months edge out optimistic predictions. On balance, area companies expect a pickup in both orders and shipments while order backlogs continue to fall. With some further slippage on the horizon, local firms plan additional cuts in payrolls and working hours between now and next spring.
Retail
Third District retailers generally described sales as having run at
a satisfactory rate in August and into September. Department store
sales showed a year-over-year increase of approximately 6 percent,
in dollar terms, while discount and specialty stores achieved
somewhat better gains. However, some local specialty chains that
have been expanding locations aggressively indicated that results at
new stores were not meeting expectations.
Nearly all retail contacts reported that inventories were under control. Auto dealers trimmed inventories as sales picked up in August with new manufacturers' incentives to clear out 1989 models
.Area merchants said they are being cautious in their planning for the rest of the year. Orders to suppliers are conservative and promotional plans are modest. Store officials generally do not anticipate a consumer pullback in the months ahead but they believe that some slackening in demand through next spring is more likely than an acceleration in spending.
Finance
Outstanding loan volume at major Third District banks in late August
was approximately 12 percent above the level at the same time last
year. Commercial and industrial loan growth was described as good by
bank lending officers contacted in early September, but several
noted that growth has been easing over the summer and they believe
it is likely to slacken further as the year comes to a close. The
slower growth is predicted by area bankers as a result of easing
demand as well as a tightening of credit standards. Besides taking a
more restrictive stance with regard to new applicants for business
loans, some banks indicated they were winding down relationships
with current borrowers who do not meet more rigid credit standards.
Consumer loan growth picked up in August, primarily due to increased auto loans as consumers took advantage of manufacturers' rebates. Other categories of consumer lending were showing only slight growth, according to local bankers. As with business lending, personal loan credit standards are being tightened by several banks in the region; lending officers said this move is being taken even though they do not expect strong loan demand from consumers.
Real estate lending continued to grow at a strong pace at most Third District banks. However, bankers noted that weakness is developing in office leasing in some suburban areas and they plan to limit the expansion of commercial real estate lending.