October 23, 1991
Reports from the Third District business community in early October suggest that overall economic activity has been slower recently than it was in late summer. Manufacturers indicated that business was still moving up, but at a slower pace than in previous months. Retailers reported that sales remained sluggish, and auto dealers said sales were very slow. Bankers noted a continuing decline in business lending and some said that consumer lending, which had been steady through the summer, turned down in September.
The outlook is mixed. Manufacturers continue to express a high level of optimism, while the view ahead is dim in other sectors. Retailers do not expect to post real gains in sales for this year's fourth quarter compared to last year's. Auto dealers are pessimistic for the new model year. Bankers anticipate a continuing downward trend in financing activity for both businesses and households. Many business contacts cite low confidence as a deterrent to expanded spending by firms and consumers, and they say the factors required to restore confidence are less restrictive conditions for business credit and a healthier employment situation.
Manufacturing A majority of Third District manufacturers contacted in early October reported that business was running at a steady pace. Based on these reports, it appeared that shipments from area plants were increasing slightly, on balance, while new orders were declining marginally. Approximately half of the manufacturers surveyed said they were cutting inventories and one-third indicated they were maintaining them at stable levels. Employment appeared to be somewhat weaker than in recent months; although approximately two- thirds of the industrial firms contacted were holding to steady employment and working hours, nearly one-fourth were cutting payrolls.
Although recent indications are that the upward trend in the region's goods-producing sector was slackening, most of the manufacturers polled for this report were optimistic that further improvement is likely. Three-fourths expect increases in orders during the next six months and two-thirds anticipate stepping up shipments. Despite these forecasted gains in output, employment plans at plants in the Third District call for no change in the work forces, on balance, although a small increase in hours is possible. Capital spending could get a boost as one-third of the firms surveyed indicated they will increase expenditures for plant and equipment over the next six months while half will hold to steady rates of spending.
Retail
Third District retailers generally indicated that sales in September
were just even with or slightly below the level of last September,
in current dollars. The year-over-year comparison appeared to be
relatively better for discount stores than for department and
specialty stores--except for toy stores, where there were some
reports of good sales growth. Most store executives said they were
satisfied that their inventories were in line with current and
expected sales.
Third District merchants contacted for this report generally did not expect any improvement in the pace of sales in October, and they were nearly unanimous in giving very subdued forecasts for the Christmas shopping season. The consensus of expectations is that the best that can be hoped for is flat or very slightly better sales, in dollar terms, this year compared to last. Some retailers suggested that solid improvement will not take hold until next spring at the earliest. They describe the consumer as reluctant to step up spending while the economic outlook remains uncertain.
Most auto dealers reported that unit sales in September were well down from a year ago, and many said sales were the lowest in many years for the month of September. Even dealers who managed to achieve steady unit sales said dollar sales were insufficient to maintain profit margins. In general, dealers' forecasts for the 1992 model year are very pessimistic.
Finance
Third District bankers reported that total loan volume outstanding
continued to decline in September and early October, with declines
in business and consumer credit and near stability in real estate
based loans. Commercial and industrial lending continued to fall
off, according to bankers, as a result of low loan demand and banks'
conservative approach to new business lending. Consumer loan volume
outstanding has varied week-to-week recently, but most of the
bankers contacted for this report said the trend has been down.
Several bank executives said they believe consumers are making
efforts to pay down debt, especially on credit cards. In contrast,
revolving home equity credit volume has been stable and outstandings
for other real estate lending have been virtually steady.
Bankers generally believe the current downward trend in lending will continue until confidence is restored among businesses and consumers. Some bank loan officers noted weakening financial condition in the small business sector that portends a decline in financing activity at these types of firms. Nonetheless, a stabilization or turnaround is possible for business lending in general, according to some bankers, if interest rates fall further. These bankers said that lower rates could encourage some of their potential borrowers to implement investment plans. A turnaround in consumer loan demand is dependent on an improved employment situation and a return of consumer confidence, in the view of most Third District bankers.