October 31, 1990
Economic activity in the Third District was generally sluggish in mid-October, with further weakening in manufacturing and retail trade and mixed reports from the banking sector. Manufacturing activity in the region continued to fall in October, and reports of slower business were more widespread than they were a month ago. Area firms noted declines in orders and shipments and said they were trimming employment. Retailers generally said sales were weaker than they had expected for the fall. Most reported sales running at or below year-ago levels, in dollar terms. Large Third District banks have been posting very slight gains in loan volume, overall, during the past six weeks. Most of the growth has been in consumer lending, including home equity loans, while commercial and industrial loan volume continued to fall.
Third District business contacts express concern that the regional economy could weaken further. Manufacturers expect business to drop further over the winter. They generally intend to hold capital spending to a steady rate over the next six months, and they plan more cuts in employment. Retailers are growing more cautious in their outlook. They hope to match the dollar sales level reached in the final quarter of last year, but they expect profits to suffer if extensive discounting is required to achieve this. Bankers anticipate slackening loan demand in all credit categories until the economy regains strength and they foresee only a modest rebound in lending even with a renewed business expansion.
Manufacturing
Manufacturers in the Third District continued to report
deteriorating business in October. Over half of the firms contacted
indicated that activity at their plants in the region was slowing,
and weakness was noted in every major industry in the region with
the exception of stone, clay, and glass products. Area firms
generally were experiencing a downtrend in both new orders and
shipments, and the declines were more widespread in October than
they were a month ago. In tandem with the drop in shipments,
reductions in inventories reported by area firms indicated a slowing
pace of output. Falling production activity was also reflected in
deteriorating employment measures; virtually none of the firms
polled was adding workers, and more than a third of the companies
surveyed were scaling back working hours.
The outlook for the next six months among surveyed manufacturers remains pessimistic, on balance. About a third of the local plant managers surveyed expect a turn for the better but nearly half anticipate further weakening in the industrial sector. The consensus forecast is that the slowing trend in new orders and shipments will continue over the winter. With the declining pace of business, area firms expect to work down both order backlogs and inventories further between now and next spring. They also plan more cuts in employment. In line with their cautious outlook, area manufacturers said they will hold capital spending to a steady rate over the next six months, on balance.
Retail
Third District retailers contacted in mid-October overwhelmingly
indicated that the pace of sales was below their expectations. Most
said that sales for the past six weeks were flat or below the year-
ago period, in current dollars. The usual fall upturn in sales has
not materialized, according to merchants, and while some attributed
this to unseasonably warm weather in recent weeks, the slow sales
rate has affected all types of goods-not just seasonal merchandise-
and all types of stores in the Third District.
Merchants are becoming apprehensive about sales for the rest of the year. They hope to match the 1989 final quarter, in dollar terms, but say that if price markdowns are necessary to do this their profits will drop significantly. Store officials generally said they are satisfied with inventories, but stocks could prove excessive if sales decline further. One merchant noted that vendors are becoming more reluctant to ship under the usual credit terms in light of generally poor retail sales prospects and the continuing financial difficulties of certain major stores.
Finance
Total loan volume outstanding at major Third District banks barely
increased in September after slipping in July and August, and while
lending continued to gain slightly in early October, area bankers
said they did not believe a sustained pickup in loan demand was
getting underway. Most of the recent growth has been in consumer
loans; bankers contacted in mid-October said credit card and other
personal installment lending was moving up slowly but steadily,
although auto loans were dropping fairly sharply as a result of both
falling demand and tightened credit standards. Real estate lending
was also moving up, and bank loan officers indicated that a
substantial portion of the increase was the result of recent home
equity loan promotions. Also, some banks were taking residential
mortgage loans onto their own books as opposed to placing them with
their mortgage company affiliates. Commercial and industrial loan
volume in mid-October was still on the downward trend that began
during the summer. Bankers generally noted weak demand for credit by
businesses and some said their outstandings were reduced by recent
charge-offs.
Looking ahead, Third District bankers expect a falloff in loan demand until the economy regains strength. They anticipate drops in all categories of credit until business and consumer spending picks up. Some bankers believe that even with an economic upturn, lending, especially to businesses, will grow only slowly, due to heightened concerns for credit quality and moves by banks generally to improve capital ratios.
Total deposits at large Third District banks declined in September although, overall, deposits have been steady in recent months. Bankers surveyed in mid-October said the funding situation was adequate given slow current and anticipated asset growth. However, some noted developments that portend funding difficulties in the longer term; bankers referred to the recent severing of some long- standing interbank borrowing relationships and declining interest by institutional investors in placing uninsured funds with banking companies.