Overall economic activity in the Third District increased in early July, although the rate of growth appeared to be easing. The manufacturing sector improved but not as much as in June. Retail sales of general merchandise rose, but auto sales were flat. Bank lending increased, although demand for residential mortgages continued to fade. Service industry activity rose, but the pace of growth has slowed somewhat from the first half of the year.
Third District business contacts generally expect business activity in the region to expand in the second half of the year, but not quite as strongly as in the first half. Manufacturers expect further gains, but not a strong advance. Retailers anticipate sales to continue growing near the current rate, but they say it is difficult to predict how successful the fall season will be. Auto dealers expect sales to remain sluggish through the rest of the year despite the reintroduction of manufacturers' incentives. Banks anticipate a moderate increase in overall lending, but they forecast a further decline in mortgage lending for home purchases. Service-sector firms expect business to continue to rise in the second half of the year, but not as rapidly as in the first half.
Manufacturing activity increased in early July, but the upward momentum was slight. Around one-half of the Third District manufacturing companies contacted for this report said that shipments and new orders in the first weeks of July were level with June; only a few more firms reported increases than reported decreases. On balance, area manufacturers reported a decline in order backlogs and a shortening in delivery times. Demand increased in July for metals and industrial materials but slipped for many other manufactured products. Firms supplying the residential construction industry noted sharp drops in orders.
Overall, manufacturers expect business conditions to improve in the second half of the year, but they do not anticipate a strong advance. Somewhat fewer than half of the firms contacted in early July expect their shipments and orders to increase during the next six months; about one-fourth expect decreases. On balance, capital spending plans among District manufacturers call for modest increases in expenditures.
Most of the retailers contacted for this report indicated that sales in June and early July increased from the same period a year ago. The increases varied among stores. Stores specializing in luxury items posted stronger annual gains than stores specializing in low-priced goods. Among types of merchandise, apparel sales were relatively strong, boosted in part by clearance sales. Some stores reported better customer traffic than usual for this time of year, as did some restaurants. Third District retailers expect sales to be seasonally slow until the back-to-school shopping period gets under way. Although they are uncertain about the prospects for fall, they do not see any signs that sales growth will slip from the recent pace.
Auto sales in the region were virtually steady in June and early July but below the level recorded in the same period a year ago. Dealers said domestic manufacturers' incentives and discounts were propping up their sales, but foreign models continued to have better year-to-year sales comparisons than domestic models. Inventories were above desired levels but appeared to be steady. Despite support from manufacturers' incentives, dealers in the region expect sales to be sluggish for the rest of the year.
The volume of loans outstanding at Third District banks rose modestly in June and early July, according to commercial bank lending officers contacted for this report. Commercial and industrial lending increased for most banks. Credit card lending expanded, but other types of personal lending have been virtually flat. Demand for residential purchase mortgages eased. Deposit interest rates were rising at commercial banks amid competition among financial institutions within the region as well as from those outside the region.
Bankers in the District expect continued growth in business and consumer lending in the months ahead, although they believe the rate of growth is slackening. They also expect gains in credit card lending, but they expect little if any growth in other types of personal lending. They expect residential mortgage demand to decline further.
Most of the Third District service firms contacted in early July reported that activity was increasing, but for many firms growth has moderated from the pace set earlier in the year. Business services firms generally indicated that many of their client firms were attempting to limit growth in the use of outside services as they deal with rising energy and commodity prices. Trucking firms reported continuing increases in activity. They noted that transportation capacity in general is tight, and that demand for quick delivery of time-critical shipments has not been diminished by rising charges. Employment agencies and temporary help firms reported that demand for workers has been rising at a nearly steady pace. Service-sector firms expect business to continue to advance, but they expect growth to be slower in the second half of the year than it was in the first half.
Prices and Wages
Business firms in the Third District reported continuing increases in the costs of raw materials and intermediate goods. Manufacturers noted recent increases in prices for lumber, metals, petroleum-based products, and chemicals. Firms in all industries indicated that high energy prices continued to contribute to elevated operating expenses. Some firms have postponed maintenance and improvement projects, where possible, in response to higher than budgeted costs.
Employers in a range of industries reported that labor markets remain tight. Most of the firms contacted for this report indicated that wage and salary levels have been edging up. Employers said they have been having difficulty filling certain professional and managerial positions, and they have raised salaries more for these positions than for others.