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Business activity in the Third District, on balance, appeared to soften further in March, although some sectors made slight gains. Manufacturers reported declines in new orders and shipments, overall. Retailers generally reported sluggish sales, with many posting year-over-year decreases. Auto sales continued to fall. Bank lending has continued to increase moderately. Residential real estate sales and construction remained well below the pace of a year ago. Commercial construction activity remained slow. Service-sector firms gave mixed reports; some have had modest growth, but others have experienced declining business. Reports of increases in input costs and output prices were about as prevalent in March as they were in February. Wage increases were reported to be moderate.
The outlook among Third District businesses varies. Manufacturers' forecasts have improved somewhat since the last Beige Book. On balance, they expect increases in shipments and orders during the next six months. However, retailers have generally made further downward revisions to their 2008 forecasts, and some are uncertain that sales will turn up before the year comes to a close. Auto dealers expect sales in 2008 to be below those of 2007. Bankers anticipate slow expansion in overall lending but expect further deterioration in credit quality. Residential real estate agents expect sales to continue to be slow through the rest of the year. Contacts in commercial real estate anticipate slower leasing activity and fewer building sales this year compared with last year.
Manufacturing
Third District manufacturers reported falling shipments and new orders, on balance, in March compared with February. Around one-fourth of the manufacturers surveyed noted decreases, and around one-fifth noted increases. Manufacturers also reported a drop in order backlogs, on balance. Increased demand for their products was reported by producers of metals, metal products, and machinery. Decreased demand was noted by producers of apparel, furniture, and industrial materials. Regional manufacturers' assessments of current business conditions varied greatly, with some reporting "quite good" business, while others reported "low demand." One contact noted that the trend in new orders was "very spotty," and another said the "spectrum of client confidence ranges from optimism to gloom."
The outlook in the Third District manufacturing sector has turned positive, on balance, since the last Beige Book. One-third of the manufacturers polled in March expect new orders and shipments to turn up during the next six months, and one-fourth expect further declines. However, capital spending plans at area manufacturing firms remain weak, with no increases in spending planned, on balance.
Retail
Retailers in the Third District generally reported continued sluggishness in sales in March, and many stores have posted year-to-year decreases in recent weeks. Most store executives said consumer confidence has dropped significantly. Sales have slipped for nearly all lines of merchandise and for all types of stores. Stores oriented toward middle- and lower-income shoppers appear to be experiencing a greater weakness in sales than those serving upper-income shoppers. An executive at a large mid-price retailer said, "our consumer has pulled out of the market."
The outlook among retailers in the District is not positive. The early response to spring merchandise, according to a department store chain, "is not looking good." Several store officials said they have made further downward revisions to their sales forecasts for the year, and most are limiting inventories. Many of the retail executives contacted for this report also expressed concern about growing difficulties in financing their operations, noting recent reductions in the availability of both short-term credit and long-term financing.
Auto dealers in the region generally reported a continuing downward sales trend in March. Inventories have increased with the sales slowdown, but dealers have been limiting restocking. Dealers in the region have reduced their forecasts for the year, and the consensus is that sales are unlikely to improve much, if at all, from the current rate.
Finance
Total outstanding loans at Third District banks rose moderately in March across major credit categories. Banks and other financial institutions making home mortgage loans reported a slight pickup in originations, on balance, in March compared with February. A majority of the new loans are conforming mortgages that have been sold to the national mortgage agencies, although, according to one contact, "gold-plated" jumbo mortgages are being made and retained, albeit at higher rates and lower loan-to-value ratios than heretofore. Bankers said they are actively seeking to expand commercial loan portfolios but are being more selective in evaluating potential borrowers, and they are limiting commercial real estate lending. Banks in the District are expanding personal lending. Most bank contacts indicated that asset quality overall continued to weaken, although most of those surveyed for this report said increases in delinquencies and chargeoffs have been moderate. Looking ahead, bankers generally foresee slow growth in overall lending during the rest of the year, and they expect some further deterioration in credit quality before loan performance measures begin to improve.
Banks and other financial institutions continued to report frictions in secondary markets. According to one contact, "liquidity is scarce and trading is difficult" as most institutions are focused on rebuilding capital. In response to retrenchment in secondary markets, some banks in the District have stepped up promotional efforts to gather retail deposits.
Real Estate and Construction
Residential real estate activity in the first quarter was well below the pace of the same period last year. A contact indicated that housing demand has been "weak, with jumbo and subprime mortgages gone." Residential real estate agents said that inventories have increased, as have average days on the market. Prices for both new and existing homes remained under downward pressure. Real estate agents said that some sellers of existing homes have pulled them off the market rather than accept large reductions from asking prices, and a builder indicated that his "asking prices couldn't get low enough" to clear out inventory. Contacts saw a few signs of rising interest in home buying in March, with some increased traffic both in person and on websites, but they have yet to see any increase in sales. In general, residential real estate contacts do not expect market conditions to improve this year.
Commercial real estate firms indicated that many proposed projects have been put on hold in response to reductions in available financing and pullbacks by prospective tenants. Rents have remained stable, but building prices have come under some downward pressure as investors' interest in commercial real estate has ebbed. Contacts anticipate slower sales, construction, and leasing activity this year than last year, but they expect rental rates to remain fairly stable.
Services
Service-sector firms gave mixed reports on business conditions in March. Business services firms, other than those associated with real estate and construction, generally reported modest growth. Firms serving the real estate and construction industry, such as engineering and design firms, reported slowing business. Transportation companies also indicated that business has slowed recently. Employment agencies and temporary help firms reported that demand for workers grew steadily in the first quarter, but they expect a slowdown in hiring through midyear. Most of the service-sector firms contacted for this report expect current trends in business to continue through midyear, with slow growth for firms currently making gains but further declines for those firms whose business has been falling.
Prices and Wages
Reports of increases in input costs and output prices from Third District business contacts were about as common in March as they were in February. Firms in the region noted increases in the prices of food products, chemicals, industrial materials, metals, and electrical equipment. They also reported rising costs for energy, and some noted that further increases are expected. Most of the firms reporting on employment costs in March indicated that wage increases remained moderate, although some noted that wage offers for some hard to fill positions have been raised by substantial amounts. However, an increasing number of firms appear to be implementing hiring freezes in response to current or expected slowing in business activity.
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