December 9, 1992
Summary
Business activity in the Fourth District continues to expand
unevenly across industries. Retailers, reporting stronger year-over-
year sales increases in October and early November, plan to carry
larger inventories than they anticipated a few months ago. Growth in
manufacturing production has revived in recent months, but some
producers see no change in activity so far this quarter from last,
while others report that orders and production are better than they
estimated previously. Although District respondents anticipate
larger gains in their business next year than in 1992, they foresee
little growth in employment because of continued emphasis on
productivity improvement.
Consumer Spending
Retailers in the Fourth District generally agree that sales in
October and early November were better than they previously
estimated. Consequently, they raised their sales estimates for the
1992 holiday season, and now anticipate a larger percentage increase
this year than last. One discount retailer, however, experienced
smaller year-over-year gains, largely in apparel, which they believe
may represent a shift by consumers to more upscale stores.
Retailers attribute some of the recent unanticipated sales strength to special factors, especially the colder-than-usual weather in October, which boosted sales of outerwear and sweaters. They uniformly plan to build larger inventories than they previously expected, and one retailer has decided to expand its stocks of gift- type goods.
Economists associated with consumer spending estimate a 2% to 3% increase in real consumer spending this quarter from last, which is slightly higher than their earlier forecasts, but a let-up from the rapid pace of the third quarter.
Auto dealers were disappointed that November new car sales weakened for both domestic and foreign makes, although light truck sales strengthened again. New car stocks are believed to be adequate, and dealers apparently will hold back on factory orders to prevent inventories from growing too rapidly.
Manufacturing
Growth in manufacturing output has revived in recent months, but
capital goods producers still report mixed activity so far in the
fourth quarter.
Some producers of electric motors and equipment, welding machinery, and industrial bearings report that business so far in the fourth quarter has been about unchanged from the third, perhaps because of talk about an investment tax credit next year, according to some industry sources. Orders and production of heavy-duty trucks, however, have been rising rapidly in recent months to levels that are approaching 1988 highs, although suppliers of truck components believe that the surge is associated with anticipated truck price increases. Some producers of industrial controls note signs of a turnaround in their business.
Steel producers estimate that orders and production this quarter will be higher than they forecast only a few months ago. Operating rates of some producers are presently averaging close to 85% of capacity, with demand strongest for flat-rolled steel products. Hedging against a scheduled 3% steel price hike in January may be pulling some business from early next year into this quarter.
Auto producers still estimate that production and new car sales this quarter will still be slightly higher than last, despite a sag in November new car sales. Production of light trucks continues to rise, partly at the expense of passenger cars. Market shares of the Big Three auto producers will likely benefit from more rapid increases in prices for foreign than domestic nameplates, according to some industry contacts.
Employment
Manufacturers and depository institutions plan no big step-up in
employment next year, even though they anticipate more-rapid growth
in their output and revenues. Achieving further productivity growth
appears to be a common goal of District respondents.
Some manufacturers believe that they have sufficient capacity to accommodate a higher production level in 1993 and can resort first to more overtime hours and then to a recall of laid-off workers before adding new employees. Only a few anticipate that their business will expand enough to require new hiring, and then probably not until next spring. Auto sources indicate no prospect for employment growth because of further long-term cutbacks by some producers and only replacement hiring by others.
Some retailers are planning a larger increase in hirings for this holiday season than last, but many plan to achieve greater productivity growth by increasing use of technology, just-in-time stocking, and self-help centers within stores.
Financial Developments
Banks report that they are aggressively seeking qualified borrowers,
but that loan demand remains soft. They see more intense competition
for business loans, with some banks apparently paring their margins
to meet bank and nonbank competition. The exit of a major issuer of
commercial paper has led to some recent increase in business loan
activity, according to some lenders.
The recent heavy volume of mortgage refinancing has let up since the latest rise in mortgage interest rates, according to several banks and thrifts. A few large lenders, who did not increase their mortgage rates in recent months, report that loan refinancing and new mortgage loan applications in November were strong.