December 8, 1993
General Business Conditions
Reports from business contacts throughout the Fourth District
generally paint a picture of expanding economic activity, albeit at
modest rates. Furthermore, most accounts suggest that this moderate
growth path is expected to persist into 1994.
Activity associated with automobile production and sales appears to be the salient feature of the current economic environment. Lenders indicate that auto loan demand has been particularly robust, and capital goods producers cite automobile-related orders as a specific source of strength.
Despite the continued expansion of economic activity in the Fourth District generally, only marginal employment growth is reported. Small business representatives, in particular, note that smaller enterprises simply are not adding new employees.
The passage of NAFTA is widely viewed as a positive among businesspeople in the Fourth District. Nonetheless, little impact from the accord is predicted in the short run, and optimism arising from its passage is tempered by persistently slow economic growth among many of our major trading partners and by lingering concerns about pending health care reform and other regulatory issues at home.
The most significant financial development is the apparent topping- out of mortgage refinancing. Lenders uniformly report that home mortgage activity has dwindled in the last three weeks. However, contacts in the construction industry anticipate a pickup in new home demand coinciding with a growing perception among consumers that interest rates will soon head higher.
Capital Goods
Capital good producers are strongly optimistic about auto sales and
production, citing the industry as a major source of strength into
1994. In addition, both general machinery and construction demand
contribute to a generally optimistic outlook. Weak foreign demand
remains a source of concern, despite the common belief that passage
of NAFTA will eventually help business.
Auto Dealers
Continuing the trend reported in the last Beigebook, growth trends
in Fourth District motor vehicle sales leveled in late October and
November. Dealers are quick to point out, however, that current
sales remain well above rates of the same period a year ago.
Contrary to reports in the past several months, motor vehicle sales
in major Fourth District markets appear to have edged slightly below
national rates. While traditional sales are reported flat, vehicle
leasing continues to grow rapidly, and most dealers (as well as the
Big Three manufacturers) report that they are actively promoting
this alternative to traditional buying.
Retailers
Overall sales gains for Fourth District retailers were less than
anticipated during much of the early fall (through mid-October), and
year-over-year increases for traditional back-to-school merchandise
were marginal. However, it appears that consumer demand began to
pick up in late October and has risen substantially during November
(reported year-over-year November gains were in the 5 to 10 percent
range).
Retailers believe that increasing demand for discretionary spending items may signal that consumers will indulge in more-liberal holiday spending. However, some retailers also attribute a significant portion of their recent success to aggressive advertising and price discounts. Furthermore, most maintain that their markets are increasingly competitive and that they expect profit margins to tighten even further.
Lending Activity
Although mortgage activity has been quite strong in the last three
months, most of it has been associated with refinancing. One bank
representative reports that about 60 percent of recent mortgage
business has been related to refinancing. However, there has been a
marked "cooling off" of mortgage activity in the last three weeks, a
phenomenon reported by lenders across the board.
Strong demand is reported for consumer loans, especially auto loans, but mixed signals are being given on loan demand from other sources. Some modest increase in lending to small businesses is reported, but this activity appears to be sporadic. Furthermore, while some lenders report a belief that commercial and industrial lending in the Fourth District is showing strength relative to the United States as a whole, others report that commercial and industria1 lending activity is flat.