May 2, 1990
The Third District economy showed some signs of improvement in April although measures of current business conditions indicate just slight gains from the first quarter, overall. Manufacturers continue to report declining business, but the extent of the slowdown among area firms has abated recently. Retailers generally report marginal gains in real sales in recent weeks, an improvement from the pace of sales earlier in the year.
Most sectors of the Third District economy are not experiencing any difficulty obtaining credit, and evidence of a "credit crunch" is largely confined to commercial real estate. Bankers note steady growth in overall loan demand; they were posting business loans at a somewhat greater rate in March and April than they had in the first two months of the year, although consumer lending was growing only slowly.
The outlook in the Third District business community is generally for modest growth, overall, and there is some confidence that the downturn in the region's industrial sector may soon be reversed. Among manufacturers, more foresee a rebound in the second half rather than further slowing. Retailers generally think they will continue to post real gains through the rest of the year although they do not expect a broad upturn in sales. Bankers expect lending to rise steadily, boosted by increased industrial loan demand, but they anticipate further constriction of real estate financing and only slight gains in personal lending.
Manufacturing
Manufacturing activity in the Third District edged down again in
April, but the extent or the decline among the firms surveyed
appeared to be easing. After relatively widespread reports of
slowing business in February and March, the number of companies that
reported weaker activity in April only marginally exceeded the
number noting improvement.
Although some specific indicators of industrial activity showed improvement in April, most continued to signal weakness. Shipments were increasing and new orders were inching up, reversing two months of decline. But other measures of business conditions were still falling. Managers at area plants said the increase in new orders from March to April was not enough to boost order backlogs, which continued on a nearly year-long decline. Other signs of the ongoing downtrend in the manufacturing sector are delivery times, which continued to decrease, and employment; on balance, both personnel and working hours were being reduced as area plants in April. Slack conditions in manufacturing are also reflected in stable industrial prices. Most local companies reported steady prices in April for their own products as well as for purchased inputs.
Looking ahead, manufacturing contacts expressed some optimism despite lackluster current conditions. In their forecasts for the six months ahead, two-out-of-five expect business to pick up while one-in-five think the current downturn has further to run. In general, executives at area firms expect the decline in order backlogs to level off, but they do not expect business to improve enough in the next two quarters to increase that backlog. They do not foresee any improvement in employment, either; although they intend to hold payrolls steady, they plan further reductions in working hours, on balance. Some indication of a more optimistic outlook for business in the longer term is given by capital spending plans at area plants. After two months in which more companies reduced spending plans than increased them, scheduled expenditures for new plant and equipment were being boosted marginally in April.
Retail
Retail sales in the Third District in March and the first half of
April were marginally above sales in the same period last year, in
real terms, according to area merchants, and most of those contacted
in late April said sales appeared to be continuing on a trend of
slight but steady real growth. Sales of spring apparel and other
seasonal items have been meeting most retailers' expectations, and
without recourse to deep price markdowns. Several merchants also
mentioned a continuing healthy sales pace for furniture and home
furnishings.
The general tone of the forecasts being made by Third District retailers is for very modest real growth during the rest of the year. Several described the immediate outlook as unsettled due to financial turmoil in the industry and heightened caution among consumers. In their own planning, store executives are looking for niches of opportunities to expand sales; they do not expect sales to grow across a broad range of goods.
Finance
Total loan volume at major Third District banks in late March was
approximately 17 percent above the level for the same time last
year, and bankers contacted in late April said overall loan growth
was continuing at about this pace. Third District bankers generally
reported increased loan demand from builders and developers, and,
although they are approving new loans selectively, they are being
more cautious about real estate lending in light of increased
regulatory concern and evidence of softening markets both for office
space and for residential development.
Lending officers at commercial banks in the District say business loan demand is picking up somewhat from the first quarter, and some note an increase in requests for funds to finance capital investments in the manufacturing sector. Also mentioned was increased loan demand from construction firms engaged in road and bridge building in the District.
Consumer loan growth was described as sluggish by most bankers surveyed for this report. Some noted what they considered seasonal increases in utilization of credit cards and home equity credit lines, but most said overall personal lending was not growing appreciably.
Looking ahead, Third District bankers generally expect overall loan growth to continue as about its current pace. They believe business lending may accelerate, with the expansion mainly in loans to manufacturers; but they expect loan volume outstanding to builders and developers to remain at current levels or decline, and lending to wholesalers and retailers to show little growth. Lending to individuals, both for consumption expenditures and for home mortgages is expected to rise only marginally.
Credit conditions
Bankers note that, with a few exceptions, they are restricting
commercial real estate financing to current customers and limiting
the amount of new money extended to them; but they say a general
restriction of credit--such as is implied by a "credit crunch"--is
not being implemented. Creditworthy industrial firms are generally
finding their requests for funds well-received, according to both
bankers and businessmen. However, some entrepreneurs with very small
or start-up businesses say they have been experiencing somewhat
greater difficulty obtaining funds in recent months, and there are
some indications that apparel manufacturers' requests for loans are
receiving greater scrutiny in light of the financial difficulties of
certain retailers to whom they sell.