June 21, 1995
Economic activity in the Third District showed some signs of slowing in late May and early June, according to comments from business contacts. Manufacturers continued to report declining demand for their products, and they were scaling back production. Retailers generally reported that sales were running at a steady pace, but below plan, and many were implementing unscheduled price reductions to keep inventories from rising to problem levels. Auto dealers also said that sales were slow and that inventories were above desired levels. Comments from bankers indicated that loan demand remained soft. While consumer lending has edged up, business loan volumes have been slipping. On balance, bankers indicated that mortgage lending has not picked up despite the recent decline in interest rates.
Third District businesses contacted for this report foresee little change in conditions in the second half of the year. Manufacturers expect a slight pickup in orders and shipments, on balance, but they plan to trim payrolls and cut back capital spending nonetheless. Retailers do not anticipate a significant rebound in sales during the seasonally slow summer months, but some auto dealers said vehicle sales could pick up by the fall if auto financing costs declined. Most of the bankers surveyed do not expect any strengthening in overall credit demand, and they see no signs that competitive pressure for new lending is abating.
Manufacturing
Third District manufacturers continued to report declining activity
in early June. While about half of the firms contacted were
operating at a steady pace, about one-third were experiencing
softening demand for their products-twice the number that reported
increased business. In most of the major industrial sectors in the
District, orders and shipments were declining. Manufacturing
employment was also trending down in early June: while three-fourths
of the firms polled were maintaining steady staffing levels, one-
fourth were reducing work forces.
Industrial prices in the region continued to move up, according to manufacturing contacts, although reports of increases appeared to be somewhat less widespread than they had been earlier in the year. Nearly one-third of the firms commenting on prices said input costs continued to increase while about two-thirds said they were steady. For their own products, only one in ten of the firms surveyed were raising prices; three-fourths were holding prices constant.
Third District manufacturers are nearly evenly divided among those expecting further slowing, those expecting a leveling off at current production rates, and those anticipating a rebound in activity. However, firms expecting increased orders for their products slightly outnumber those predicting a further drop. Nonetheless, Third District manufacturers plan further reductions in employment, on balance, and some scaling back of capital spending during the second half of the year.
Retail
Most of the Third District retailers contacted in early June said
sales have been running at a steady pace in recent weeks, but many
also said the sales rate was lower than they had expected. Some
merchants also noted that the pace of sales at discount stores,
while steady recently, had declined from the pace set earlier in the
year, even after accounting for seasonal factors. Several merchants
said inventories going into June were above planned levels and price
reductions were being made to reduce stocks. Some store executives
said additional promotional efforts may be instituted in an effort
to keep sales from slipping further during the summer. Other
indications of slackening consumer demand were reports that a major
store chain would be closing some stores in the District and that
another chain was reducing hours for its sales workers.
Auto dealers in the District generally reported a slow pace of sales for May and early June, and they said inventories were moving up. Dealers were reducing their forecasts for the full-year level of sales, although some said they thought sales could pick up by the fall if auto financing costs declined.
Finance
Third District bankers contacted in early June generally said loan
demand remained soft. Comments from bankers indicated that overall
lending was steady to down slightly. Consumer lending was on the
rise, but commercial and industrial lending has been falling in
recent weeks. While some banks reported slight increases in mortgage
activity, on balance mortgage lending in the District did not appear
to be increasing despite the recent decline in interest rates.
Third District bankers do not see any indications that credit demand might pick up soon. Most of the bankers surveyed said competition for business loans continues to be strong and that net interest margins remain narrow. Furthermore, those banks that have been able to increase consumer lending recently said they have been making strong promotional efforts to gain the additional loan volume.