Economic activity in the Fourth District grew at a moderate pace since early
October; however, the housing market, restructuring in the auto sector, and
some raw material prices have tempered enthusiasm. Production at District manufacturers
was steady to increasing with the expectation that production will remain at
current levels for the next six months. Several commercial builders report activity
has slowed, but business remains relatively strong overall. New residential
construction was mixed with a few builders experiencing a pick-up in activity.
Sales by District retailers were more in line with expectations after a somewhat
disappointing September. Loan demand at District banks was flat while core deposits
were up slightly. And the demand for trucking and shipping services continues
On net, hiring across the District was stable. Staffing firms reported increased
job openings since early October with some contacts saying that openings were
up across the board. Wage pressures are not seen as an issue at this time. Almost
all contacts said that, with the exception of metals, the rise in input costs
continues to moderate. Manufacturers attempting to raise their prices met with
a mixed degree of success. And almost all retailers reported that they were
holding their prices steady.
Since early October, production by the District's durable goods manufacturers
was stable or up slightly with higher production levels reported on a year-over-year
basis. Demand for steel products continues to soften due to weakness in the
auto, appliance, electrical distribution, and residential construction markets.
Although District auto production increased in October, a decline was seen on
a year-over-year basis. The outlook by most durable manufacturers is for production
to remain at current levels over the next six months. Two contacts expecting
lower production attribute it to seasonal adjustments. Almost all manufacturers
said they were operating at normal capacity and that capital expenditures remain
on target. Although a majority of the producers expect little change in spending,
five respondents said they were going to increase capital expenditures in 2007.
Input costs were mixed with higher costs being attributed almost exclusively
to metals. Hiring has been limited over the past six weeks; however, four contacts
said they are planning some hiring in the near future. Wage pressures are largely
contained. Several contacts reported that benefits, especially health care,
continue to rise.
Production levels at the District's nondurable goods facilities were steady
to increasing since early October and on a year-over-year basis. Expectations
for the next six months are mixed with one manufacturer saying that the auto
industry could affect their output. About half of our contacts reported idle
capacity. Most manufacturers said capital expenditures met or exceeded projections;
further, about half expect to increase spending during the next few months.
Input costs were relatively stable. Most manufacturers said they have no plans
to hire in the near future and three reported reducing their workforce during
the past six weeks. Wage pressures remain contained.
Sales by District retailers since early October were more in line with expectations
after a somewhat disappointing September. However, customers are highly selective
in their purchases. Drug stores report particularly strong sales driven primarily
by pharmaceuticals. Overall, vendor prices have remained stable during the past
six weeks with decreases seen in lumber and generic drugs. Retailers have passed
on this price stability to customers. Most contacts report wage pressures are
contained, but the cost of health care benefits continues to rise, albeit at
a more moderate rate. Aside from normal seasonal hiring, retailers are limiting
employment opportunities to new store openings. One contact reported reducing
their workforce through attrition. Retailers are expecting a very competitive
Most contacts said that new car sales declined in October for a second straight
month; further, purchases continue to be heavily dependent on dealer incentives.
Reports on SUV sales are mixed with high-end SUVs holding their own.
Residential contractors in the District are continuing to adapt to the housing
market correction through workforce cutbacks, delaying land purchases, and building
fewer spec homes. Since early October, new home sales have been mixed with about
half our contacts reporting a pick-up in sales while the other half report slow
to declining sales. Almost all builders expect that the correction will continue
until at least mid-2007. Backlogs for most contractors have decreased about
30 percent. Discounts or incentives being offered to prospective buyers are
in the range of 5-8 percent of a home's asking price. Material costs are mixed
with builders seeing declines in lumber, drywall, and cement; however, petroleum-related
products remain high. Contacts report that land and development costs continue
The District's commercial contractors reported that activity has slowed since
early October, but remains relatively strong overall. Most contacts have experienced
an increased level of business on a year-over-year basis. Contractors are anticipating
a strong first half in 2007 due to current backlogs and stable inquires. Segments
continuing to show strong activity are health care and public works; manufacturing-related
construction is beginning to pick-up. Material cost increases continue to slow
or have stabilized which is contributing to a small increase in profit margins.
Contractors reported little change in the size of their workforce, although
a few have hired or are looking to hire.
Since early October, commercial and consumer loan demand was flat to declining
for most District banks. Nearly all contacts reported a slight gain in core
deposits. Activity in the mortgage market continues to be slow; customers looking
to refinance are showing a preference for fixed-rate mortgages. Several bankers
are concerned about small increases in delinquencies; however, credit quality
remains relatively strong. The consensus outlook by District bankers is for
a continuation of tight margins and a modest deterioration in credit quality.
Demand for trucking and shipping services continues to soften with a slight
volume decrease on a year-over-year basis. Most contacts reported a slowdown
in the shipment of auto-related products. Trucking companies continue to pass
on fuel costs using surcharges; however, it's becoming more difficult due to
competition and customer resistance. Trucking companies were hiring, but activity
was limited to finding replacements due to driver turnover. One contact reported
laying-off workers. Wages have remained stable during the past six weeks.