November 3, 1993
General Business Conditions
Business activity in the Fourth Federal Reserve District appears to
have gained some momentum over the summer. Industries that had been
providing the thrust to the region's expansion, particularly capital
goods producers, continue to do so. At the same time, a pickup in
automobile sales has helped auto manufacturers. The improved
conditions are also being reflected in the loan demand, with a
somewhat surprising growth in the previously flat area of consumer-
related loans.
Although capacity is generally adequate, a few manufacturers report rising backlogs and capacity strains in some specific areas. However, among the sources we contacted, there is still considerable uneasiness concerning business prospects in 1994. Pricing remains competitive and profit margins are reportedly lean. While area business contacts report a need to add workers in some skilled positions, there is still some apprehension concerning long-term commitments to newly hired labor. Moreover, inventories are being managed cautiously at both the manufacturing and retail level.
Small business contacts round the District, like elsewhere in the county, are reporting mixed signals. Certain manufacturing and retail establishments indicate that sales are merely holding even or are even declining in some instances. Others are enthusiastic about recent orders and sales strength although few expect to expand payrolls significantly. The emergence of foreign markets has affected the region's small manufacturing businesses. Several firms indicated that a significant and growing source of sales revenue was either directly or indirectly tied to foreign demand.
Capital Goods
Domestic orders for capital goods appear so be holding up well,
according so several large District producers and in some cases
orders are running more than 10 percent above year-ago levels. A key
uncertainty in this important regional industry is the
sustainability of foreign demand. Some District capital goods
producers report a drop-off in orders from European customers.
However, demand from other foreign sources, particularly Asian
markets, continues to expand. A few areas of softness were
indicated, although these would appear to be departures from the
norm. Aerospace and defense-related capital goods demand, in
addition to some construction-related areas, are declining and
further erosion is anticipated in these markets in 1994.
Lending Activity
Lending activity around the Fourth District remains somewhat uneven.
Mortgage refinancing activity continues to be high, but new mortgage
credit is less active and sporadic by area. Consumer demand has
improved recently, presumably due to the revival in new car sales.
Other consumer credit is also thought to have improved a bit since
the last survey, and home equity credit is characterized as robust.
Commercial credit demand is noted to have grown a bit, but remains
soft. Bankers we talked with indicate that they continue to manage
their real estate exposure carefully, as there is still thought to
be a rather formidable glut of space on the market.
Auto Dealers
New motor vehicle sales continued at a strong pace in September and
early October in major Fourth District markets, following the best
summer sales season in five years. September 1993 sales ranged
between 5 and 10 percent over the same month a year earlier, and
sales rates in most major Fourth District markets continue to
outstrip national rates. Demand for domestic models is stronger than
for foreign nameplates, but dealers of transplants and imports also
report significant year-over-year sales gains. Inventory shortages
reported during the summer appear to have eased somewhat with the
arrival of 1954 models.
Most domestic dealers are encouraged by their current sales pace and are increasingly confident that a sustainable recovery is under way. They are not being quite as conservative in their ordering patterns as earlier in the year, and are increasing orders significantly for many popular models.
Retailers
As in motor vehicle markets, retailers report sales strength,
especially for durable goods. Retail sales increases have been
strongest in furniture and appliances, and to a lesser degree in
building materials. A large part of the gain in all three categories
has been associated with new and existing home sales, and in home
remodeling activity.
Retailers, although fairly optimistic about the 1993 holiday season, do not expect the dramatic rise in spending that occurred last Christmas. Orders have been conservative, and inventory control continues to be of major importance.