March 13, 1991
Summary
Economic activity in the Seventh District continued to contract in
February, but contacts from several sectors reported that indicators
have begun to show signs of bottoming out. Retail sales generally
remained soft in February and early March, although several sources
stated that the pattern of sales within the month of February may
have hinted at the beginning of a recovery. Sales and production in
the auto industry continued to be depressed, but a turnaround is
still expected next quarter. Reports from capital goods
manufacturers were mixed, with weakness in computer-related and
heavy equipment and strength in machine tools. District steel
production reflected weakness in construction and equipment demand,
as well as in auto production. Bank reports indicate that both
borrowers and lenders remain reluctant to commit to new lending
agreements, despite lower interest rates. However, lower rates may
be sparking new activity in the residential real estate market.
Retail Sales
District retail sales activity remained soft in February and early
March. However, several reports suggest some signs of resilience
after the marked weakness experienced in January. One large
department store chain stated that District sales in February
continued to show year-over-year declines, in line with results for
the nation as a whole, although the pattern of sales within the
month hinted at a bottoming out. A large catalog retailer stated
that orders showed an uptick once hostilities ended, but it was too
early to tell whether this reaction warranted modifying the firm's
cautious stance on orders to manufacturers. Two large general
merchandise retailers based in the District reported little sales
improvement immediately after the cease-fire in the Middle East. One
major discount retailer reported that District sales were above
inflation rates during February. This retailer's sales gains in the
District were also roughly in line with performance nationwide.
Sales improvement may be in part the result of bankruptcies at other
discount outlets, but sales were still strong enough to suggest that
the decline in consumer spending is bottoming out, according to this
retailer.
Autos
Motor vehicle sales in the District remained depressed in both
January and February. Several auto dealerships stated that,
following an extremely weak period in early January, sales and
traffic picked up briefly after the United States launched military
action. Few dealers contacted reported any significant sales
increases in the brief period since the cease-fire, although several
stated that consumer attitudes and traffic levels improved
measurably, leading to hopes that the month of March will show a
solid turnaround in sales. A large dealer of cars sold to upper-
income customers reported that sales fell 60 percent in January and
50 percent in February from the year-earlier periods, in part due to
new taxes. Another dealer, who characterized his customer base as
relatively stable, also reported sharply weaker sales in January,
with no sign of a turnaround in February. This contact stated that
consumers are increasingly insensitive to incentives. One dealer
argued that the decline in interest rates has not yet passed through
to the auto-buying consumer, as many financially-pressured lenders
have simply captured a higher spread. Still, lower interest rates
have helped by lowering inventory financing costs.
Increasingly frequent downward revisions to announced auto production schedules have hurt inventory planning for dealers as well as parts suppliers. Car production increased during the month of January in both 1990 and 1991. However, production in early to mid-February 1991 turned downward again, in contrast to continued improvement over the same period last year. One industry analyst reported that current schedules still call for an increased production rate (seasonally adjusted) in the second quarter over the first quarter, in anticipation of a sales rebound. However, a large dealer expressed concern that the recent acceleration of fleet sales will provide an overhang of "nearly-new" used cars, dampening a production turnaround in the event sales rebound soon.
Capital Goods
Reports from capital goods producers are mixed, with some contacts
reporting continued weakness since the beginning of the year and
others holding firm. A large manufacturer of communications
equipment stated that new domestic orders began to show year-over-
year declines in January, and the company was starting to experience
some order cancellations. Order growth had been slowing since the
latter half of 1990, but the rate of decline in January orders was
not as severe as experienced in early 1987. A manufacturer of a wide
variety of capital goods, who had experienced solid growth through
much of 1990, reported a sharp decline in orders for nondefense
machinery in January. However, a small producer of electric engines
reported strong export-based orders, resulting from the relative
weakness in the dollar. A District steel producer reported that
orders from capital goods producers, such as farm equipment and most
forms of industrial machinery, remained soft through February.
However, orders from machine tool producers were strong, along with
orders from those manufacturers who enjoyed solid export growth
potential.
Steel
After holding up relatively well through the end of 1990, steel
production fell significantly in January and early February, and the
industry's operating rate fell to about 65 percent in early February
(compared to 85 percent in the year-earlier period). A large
District steel producer reported that production has begun to lag
shipments, following some inventory building in December. According
to this contact, steel suppliers to the auto industry are
increasingly cautious about maintaining inventory at levels
sufficient to respond quickly to an auto production turnaround.
Price erosion contributed to poor steel industry profits in 1990 and may continue to hold down profits this year. One senior executive expressed optimism that the industry would benefit from price increases, which officially became effective in early 1991. However, part of the proposed increase has already been rolled back. Some industry analysts are projecting continued price erosion in 1991, citing increased competition to meet slowing domestic demand.
Credit Developments
Several District loan officers reported further tightening in loan
terms for commercial and industrial customers in early 1991.
Tightening most often took the form of higher spreads, smaller
credit lines, and increased credit-line costs. These actions were
reported more frequently, and with greater magnitudes, for lending
to large borrowers than to small borrowers. Because the new
tightening in credit-line terms only applies to new lines of credit,
the ultimate impact on total credit-line utilization may not be felt
immediately, according to several financial analysts. One District
banker, who reported little change in lending policy, also cited
weak demand as contributing to slow lending activity. However, this
contact used that potential commercial and industrial customers
seemed to be "shopping around" more often for the bank offering the
best terms.
Construction and Real Estate
Lower mortgage interest rates may have recently helped to spark some
activity in the residential real estate market. Several District
sources reported higher levels of inquiries in recent weeks, which
may translate into increased home resale activity in coming months.
One large District realtor reported that residential transaction
volume declines seemed to level off somewhat in January. The rate of
decline in February was at a much slower pace than in late 1990, and
inquiries began to increase. Most new business has been generated by
first-time home buyers.
Several contacts noted that interest rate declines are not a key factor in today's commercial market, as institutional investors remain reluctant to provide capital for new projects. One large retailer stated that the firm's new store expansion program was being held back, not for strategic reasons or internal cash flow problems, but by the inability of shopping mall developers to obtain financing for new projects. A structural steel fabricator stated that architectural firms continue to cut back on employment, a sign that a turnaround in sales of construction materials is not in sight. Industrial properties remain the strongest in the commercial market, however, and have recently been viewed more favorably by investors, according to one commercial realtor.