January 18, 1995
Summary
Business activity in the District is holding steady at a high level,
with industrial producers reporting continued growth in production
and orders. Employment levels have picked up recently, although not
in all regions or sectors. Further, there are few indications of any
broad-based wage pressures, and price pressures remain largely
centered in industrial commodities. District retailers indicate
sales were good over the holiday period, and undesired inventory
accumulations were limited. In fact, area auto dealers continue to
complain about inventory shortfalls of 1995 models.
Lending is active in most institutions, and credit margins are still narrowing. Only in the mortgage area has there been a significant drop-off in loan growth since the last District report.
Manufacturing
District manufacturers continue to report solid orders growth, and
the orders backlog in capital goods industries remains unusually
long. Export orders are also reported to be holding up well.
Chemicals, plastics, steel, heavy truck, and some machine tool
industries are reporting production levels near historic highs.
Surprisingly, capacity constraints in these industries are not
generally seen to be holding down production, and many District
producers anticipate expanding productivity further to meet current
demand. Nevertheless, resistance to adding new workers seems to have
diminished somewhat, and a few firms here indicate more willingness
to add to their permanent staffs.
Capital goods producers continue to report a further growth in orders, with the domestic auto industry a heavy source of demand. Orders for metal-cutting and metal-forming machine tools are strong, following the upward trend in steel demand: The orders backlog here extends well into 1995. Export orders for capital goods are improving gradually for European customers, and District manufacturers expect sales to Europe to improve further in 1995. Small growth in the Japanese market is also hoped for this year. However, there still is reported to be little room for substantial price increases for finished capital goods, despite reports of production constraints by many capital goods producers.
Industrial materials producers also note strong business conditions, especially steel and chemicals suppliers. Both industries are also reporting improved sales volume in Europe. Industrial materials production is reported to be near capacity and raw materials prices are still increasing, particularly for steel and certain industrial chemicals. However, plans to increase employment in these areas remain modest.
Retailing
Retail sales were strong overall during the holiday period, but
activity is reported to have diminished in late December. Some
retailers indicated a small inventory overstock at period's end,
prompting increased discount activity in early January. Indeed,
competitive pressures in the retail sector continue to exert
downward pressure on prices, and at least one major retailer noted
an easing of prices from suppliers. In general, though, inventory
positions appear to be in line with sales, with a notable exception
for apparel items, where sales performance has deteriorated further
in the wake of unseasonably warm temperatures during the period.
Seasonal employment patterns in retailing were about average, and no
shortages of temporary workers were reported.
District auto ales in December were also average for this time of year, but some vehicle types are still reported in short supply. Most dealers indicated availability problems with the 1995 models, particularly light trucks and utility vehicles. There is a presumption that low inventory positions dampened dealers' sales performance in December.
Banking and Credit
Virtually every respondent reported strong and growing loan demand.
District bankers indicate a particularly high level of commercial
lending activity-presumably a response to inventory floor plans,
although most categories of commercial lending activity were
reported to be somewhat stronger (notably new construction and
expansion). However, credit margins are narrowing, particularly for
commercial loans, where one District banker had concerns about the
erosion of credit quality.
Consumer borrowing remained high during the holiday period, and revolving credit balances are reported to be substantially above this time last year. Mortgage credit activity has fallen off, and although some of this is typical for the season, higher mortgage rates are presumed to have flattened mortgage refinancing.