August 11, 1999
Federal Reserve Districts
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Overall business activity in the Third District advanced moderately in July, and consumption spending appeared to be robust. Manufacturers posted slight gains in shipments and new orders. Retailers reported an increase in total sales from a year ago and a surge in sales of summer merchandise. Auto dealers said sales were strong in June, although there was a seasonal slowing in July. In general, bankers indicated that loan volume has been steady. Increases in business lending have been offset by decreases in consumer lending. Real estate lending was mixed. Mortgage and home equity loans have risen, but there has been some scaling back in commercial real estate lending. Tourism and recreation business in the region has been strong. Tourism officials indicated that spending for lodging, meals, and recreational activities in most resort areas so far this season has been at its highest level in a decade. Farming has suffered from drought conditions.
Forecasts by Third District businesses contacted for this report are positive, although expectations for growth appear to have moderated. Manufacturers anticipate a slow expansion during the rest of the year. Bankers expect current trends in lending to continue, but they expect a slower pace of overall economic growth that could result in loan payment difficulties for some borrowers. Retailers are more optimistic. They believe a high level of consumer confidence will encourage spending during the fall shopping season. Auto dealers also expect sales to increase in the months ahead.
The consensus among the manufacturers contacted for this report is that business activity will move up slowly in the second half of the year. They expect modest increases in orders and shipments and a further decline in order backlogs. Several firms supplying metal parts and electrical equipment to the transportation and capital goods industries indicated that production in these sectors is expected to ease in the near future. Overall, industrial firms in the region expect to trim employment in the next six months, cutting back both the number of employees and working hours.
Reports of rising input prices in the region's manufacturing sector have become more common. Prices have increased for primary metals, lumber, and paper as well as for some basic commodities used in food processing and textile production. However, firms in these industries continue to note that competition is limiting their ability to pass increases in input prices through to the prices of the products they make.
Merchants expect a seasonal slowing in the rate of sales for August prior to the back-to-school shopping period. Retailers said consumer confidence remains strong, and they expect a good fall season. Tight labor markets and some escalation of wages are causing concern among retailers. They continue to look for ways to improve efficiency in store operations in order to limit price increases, as competition among stores remains strong.
Auto dealers reported strong year-over-year sales increases in June. The growth rate of sales of sport utility vehicles slipped somewhat, but sales of luxury sedans increased. Dealers noted some slowing in overall sales in July, but they believe this is a seasonal pause; they expect sales growth to resume soon, and they anticipate a healthy sales rate in the second half of the year.
Looking ahead, bankers contacted for this report expect the current level of loan demand to persist unless interest rates move up. Competition among lenders for both consumer and business lending remains strong. Some bankers believe competition has resulted in an increase in loans to marginally qualified borrowers. These bankers have expressed concern that such borrowers may face repayment difficulties if business conditions weaken.