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Economic conditions in the Fourth District have shown little change since our last report; overall activity is sluggish and the recovery remains fragile. Reports from factories indicated that production was flat or up slightly, with increases being attributed to new orders and seasonal demand. New home sales proceeded at a slow pace, while commercial and industrial construction was very sluggish. Financing remains a major issue for residential and commercial builders. Sales by District retailers and auto dealers were generally flat. Declines in coal production have leveled out, with oil and gas output holding steady. Reports indicated little change in freight transport volume. Business and consumer lending weakened further, while core deposits continued to grow.
Large scale employment reductions have flattened out across most sectors, with some companies recalling a small number of workers. Staffing firm representatives reported an uptick in job openings across a wide spectrum of industries. Given the weak labor market, wage pressures are contained. We heard many reports of fluctuating commodity prices, especially from manufacturers and food producers. Otherwise, construction materials and product pricing were relatively stable. Capital spending and inventories remain under very tight control.
Manufacturing
Most reports from District factories showed that production was flat or up slightly during the past six weeks, with increases being attributed to new orders and seasonal demand. About half of our contacts told us that production has increased moderately on a year-over-year basis, while others said that factory output remains depressed when compared to year-ago levels. Producers are uncertain about the near-term, and they expect only modest improvements at best. Steel shipments were in line with expectations, though volume reports varied widely. Contacts reporting increased volume attributed it mainly to rebuilding auto inventories. Our steel contacts expect slow growth and are uncertain about which industries will drive demand. District auto production rose modestly during October on a month-over-month basis. Increases are attributed to automakers continuing to restock dealer inventories. Vehicle production (domestic and foreign nameplate) in the District remains well below year-ago levels.
Manufacturers reported that they have either completed rebalancing their inventories or continue to cut back. Capacity utilization is holding steady, but at rates substantially below pre-recession levels. While little incentive exists to invest in capital projects at this time, about a third of our respondents indicated that they would consider increasing spending in 2010 if warranted by more favorable business conditions. We heard many reports of fluctuating commodity prices, especially for metals. However, most affected manufacturers held back on raising their own prices. On net, there was little change in staffing levels, and wage pressures are contained.
Real Estate
Reports show there has been little change in new home construction during the past six weeks, while sales on a year-over-year basis are comparable or up slightly. Purchases of entry-level homes continue to do relatively well, and builders reported some improvement in the move-up category. Looking forward to 2010, contractors see new home construction proceeding at a slow pace. Although builders are somewhat encouraged by the extension of the first-time home buyer tax credit, all of our respondents reported that banks are unwilling to lend any money, especially for spec houses. While most builders have not increased list prices, they are moving away from offering discounts. Construction material costs are steady. General contractors continue to operate with skeleton crews, and many subcontractors are struggling to stay in business.
Commercial and industrial (C&I) construction continues to be very sluggish, though activity in public works projects is relatively stable. Most of our respondents said that business has fallen substantially on a year-over-year basis. Inquiries are coming in at a slow pace, while several builders reported having nearly depleted their backlogs. Looking forward, contractors involved in public works projects are cautiously optimistic, while their C&I counterparts expect very slow activity through mid-2011. We continue to hear numerous accounts of difficulties in obtaining financing, resulting in some projects being postponed or cancelled. On net, there has been little change in construction material costs. About half of our respondents reported reducing employment as they pare down their backlogs. Many subcontractors are struggling to find work and are contracting below cost just to stay busy.
Consumer Spending
District retailers reported that October sales were generally flat or showed a slight improvement. Results of a year-over-year sales comparison were mixed, but tended toward the down side. Consumers continue to focus on purchasing necessities rather than discretionary items and are very price sensitive. Expectations going into 2010 are for sales to remain flat or begin a slow upward trend. Vendor pricing has been relatively stable, while we heard a few reports of rollbacks in store prices and only minor promotional activity. Retail inventories continued on the lean side. Auto dealers said that new-vehicle sales were flat in October and are much slower since the cash-for-clunkers program (C4C) ended. Used-vehicle purchases were characterized as good, if not better, than new-vehicle sales. Vehicle inventories remain low but have improved somewhat since C4C ended. Most dealers expect future sales to track seasonal trends, but at a lower level. Dealers reported that incentives and promotions are less effective than earlier in the year. Difficulty in obtaining financing remains a serious issue for buyers and dealers. There has been little change in staffing levels other than seasonal hiring by retailers and job losses at dealerships that closed.
Banking
Business lending has flattened out or weakened further across most industry sectors. Bankers experiencing increased loan volume attributed it to refinancing existing debt from other institutions. Interest rates and spreads were steady to slightly up. On the consumer side, conventional loan demand was characterized as flat to down, while activity in the residential mortgage market has tapered off a bit. Several of our contacts noted that the share of new purchase mortgage applications is starting to grow. Core deposits continued to experience growth, even though bankers say that they are no longer competing on rates. Lending standards remain very tight, which may negatively impact commercial real estate borrowers seeking to refinance. Reports on the credit quality of business and consumer loan applicants were decidedly mixed. Generally speaking, the number of delinquencies has leveled off or come down somewhat, though several bankers are still seeing an upward trend in delinquencies tied to commercial and residential real estate loans. About half of our respondents said there has been some decline in the number of bank employees, though most of it is through controlled attrition.
Energy
Coal executives reported that the sharp decline in production has flattened out; however, no upturn is expected during the next few months due to large stockpiling and weak demand. Little change in oil and gas output was cited, with production expected to remain steady or begin a slow decline. Reports showed that prices received for oil were up a little, while those for natural gas were down slightly due to abundant supplies. For the most part, the cost of production equipment and materials has leveled off or dropped slightly. Capital expenditures by coal producers remain negligible, while those by oil and gas producers were close to plan. Employment in the oil and gas industry held steady, while coal executives reported some additional workforce reductions. Wage pressures are contained.
Transportation
Freight transport executives reported little change in shipping volume since our last report, with most fluctuations being attributed to seasonal factors. Profit margins remain under pressure. Most of our contacts are uncertain about near-term activity and expect only modest improvements in volume at best. Several noted that the industry needs to cut additional capacity. Rising fuel prices were reported by a majority of trucking companies; however, passing through the increases to customers has been met with a mixed degree of success. Capital spending remains soft, though some pickup is anticipated during 2010. Two trucking executives reported that they are committed to purchasing replacement equipment during the next 12 months. On the labor front, all hiring is for replacement only.
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Philadelphia