August 4, 1993
Summary District business activity continues to expand at a moderate pace. A brisk sales pace in durable goods has more than offset sluggish sales in apparel and various seasonal items. Low financing rates and consumers' desire to replace aging automobiles have combined to prompt a recent surge in auto sales, and the seasonal pickup in house sales has boosted the demand for home furnishings, appliances, and consumer electronics. Several industrial sectors continue to report strength in orders, backlogs, and production. Manufacturers of steel and heavy truck components indicate near-capacity operations. Producers of industrial controls and machine tools have also experienced strong demand in recent months, but several respondents anticipate a slackening in orders for the balance of the year. Loan officers note a softening in business loans and a leveling off in consumer loan volume in recent weeks.
Consumer Spending Fourth District retailers report a continued increase in overall sales through July, although the pace of improvement appears to have slowed from the gains in May and June. Sales activity was mixed among the various types of outlets. Off-brand discount stores fared the best, especially in apparel items, and department stores reported the strongest summer season in several years. However, specialty stores, particularly upscale clothing chains, indicated a disappointing sales performance.
Retailers generally characterize consumers as reluctant to spend and very selective in their purchases. Apparel sales have been particularly sluggish. According to several respondents, large general price hikes and an absence of new styles have discouraged shoppers. One retailer noted that heavy discounting and sales promotions have been necessary to generate sales gains in recent months. Several sources said that they have been negotiating for smaller price increases from their apparel wholesalers and in some instances have changed suppliers in an effort to control prices. On the other hand, durable-goods sales, particularly for furniture, appliances, and consumer electronics equipment, continue to strengthen--the result of considerable pent-up demand that has been augmented by demand from recent home purchases.
Low-financing rates and a perceived need to replace aging vehicles have sparked a recent surge in auto sales. Several auto dealers report increases in July as high as 20 to 30 percent over a year ago, with Big Three models outselling foreign nameplates. Big Three dealers also note that inventories are lower than desired, with stocks as low as 45 days. However, they add that they are embarking on tighter inventory control and consequently more conservative ordering.
Retailers report that summer employment has been normal to slightly below normal, although some discounters are replacing traditional sales staff with technical personnel as part of a longer-run response to more automated checkout and inventory-control systems.
Manufacturing
The recent strength in industrial activity continues to be led by
several durable-goods industries. Producers of flat-rolled steel
products report operating at virtual capacity, and they anticipate a
full order book at least through the balance of the year. Major
suppliers to heavy-truck producers also cite near-capacity
operations. Despite a slight letup in orders from the peak pace of
the first quarter, one producer is already booking orders for early
1994 delivery. In addition, industrial machinery producers note
rising output and backlogs, which they expect to result in a record
sales year in 1993. Consequently, some plan to forgo the usual
summer vacation shutdown in order to meet the strong demand. A
machine-cutting tool concern reports a recent surge in orders,
leading to further backlogs.
Some producers have seen a softening in orders and output in the past few months, however. A parts supplier to major household appliance producers reports that orders slackened in May and June, apparently because of excess finished-goods inventories. An industrial controls manufacturer indicates that orders eased in the second quarter, particularly from customers in the utility, chemical, and paper industries.
Despite peak operations in several industries, employment prospects for factory workers have not improved appreciably. Even producers facing strong demand anticipate minimal new hiring. For example, a large heavy truck producer expects to add on no more than 300 workers over the next several months, even though his firm is facing mounting backlogs.
Financial Developments
Depository institutions generally report a continued outflow of
deposits. Some institutions have attempted to reverse the trend by
initiating new instruments. For example, a large thrift found
success in attracting deposits with higher-than-market rates on one-
and two-year certificates of deposit.
Several lenders report that business loans softened in recent weeks, and one lender foresees no pickup through the balance of this year because of an increase in cash flow generated by its customers. Loan officers also note a leveling off of consumer loan demand after a flurry of activity in the spring. Declining mortgage rates have sustained a steady volume of refinancing, but low housing starts in many parts of the District have slowed the rate of new applications. For example, a large thrift indicates that the volume of new mortgage loan applications so far this summer is below a year ago, although its mortgage rates are at least 100 basis points below last year's rates and are the lowest in 20 years.