January 17, 2007
Federal Reserve Districts
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Economic activity in the Third District advanced modestly in December. Manufacturers posted small increases in shipments, but there was virtually no change in the rate of new orders. Retail sales of general merchandise rose slightly. However, auto sales remained weak. Bank lending increased moderately overall, but mortgage lending declined. Service sector activity increased at a nearly steady rate in December compared with previous months.
Third District business contacts generally expect business activity to continue to expand at a steady rate, although several of those polled for this report said the outlook has become more uncertain. Manufacturers expect modest improvement during the first half of the year. Retailers generally expect a steady, albeit slight, gain in sales, although some believe the growth rate might slow further. Auto dealers do not expect sales to pick up in the near future. Bankers generally anticipate increases in business and consumer lending, but their views of mortgage lending are mixed; some expect an increase, but others do not. Service-sector firms expect steady growth in the months ahead.
Overall, manufacturers expect demand for their products to increase during the first half of the year, but they forecast only modest gains. Among the manufacturers contacted in December, one-third expect their shipments and orders to increase during the first six months of 2007; one-fifth expect decreases. Capital spending plans among Third District manufacturers appear to be moderating. Among the firms surveyed in December, the number planning to increase capital outlays during the first half of 2007 barely exceeded the number planning to reduce capital expenditures.
Auto sales in the region continued to be sluggish in December. Year-to-year sales comparisons were again better for foreign makes than for domestic makes, although some import dealers noted an easing in growth. Inventories remained above desired levels for many dealers but were gradually being worked down. Auto dealers in the region expect sales to remain slow through the winter.
Bankers in the District expect business and consumer lending to increase modestly in the months ahead, but they say the outlook for residential mortgage lending is uncertain. Some bankers indicated that mortgage demand appeared to be firming in their market areas, but other bankers said it remained weak.
Investment companies in the Third District reported strong cash inflows as 2006 came to a close. Executives at these companies said the recent performance of equity markets had stimulated interest in stock funds among individual investors. They also noted that there has been rising demand for a variety of investment vehicles appropriate for retired individuals and those nearing retirement.
Prices and Wages
Firms reporting on employment costs in December noted a continuing trend of moderate wage increases but also large increases in benefit costs, especially health care. Many firms have recently taken steps to restrain the rate of increase in benefit costs. Among the measures implemented have been eliminating defined-benefit pension plans and requiring greater contributions toward health-care costs from employees.