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The economy in the Fourth District showed further signs of strengthening during the past eight weeks. Manufacturers reported that the rise in production which began late last year continued, although orders remain below pre-recession levels. Contacts in non-residential construction noted some signs of renewed growth, while residential builders cited only a modest uptick in activity. Sales figures from auto dealers showed a moderate improvement, whereas District retailers saw their rate of sales growth slow. Energy production was mixed, and reports indicate a better-than-expected rise in freight transport volume. Demand by businesses and consumers for new loans remains weak, while some bankers commented that the lending environment is starting to grow more competitive.
There was a broad-based pickup in employment in the manufacturing sector, where businesses are recalling workers and increasing production hours. Staffing-firm representatives had mixed reports on the number of new job openings, with opportunities concentrated in the healthcare field. Wage pressures continue to be contained. Apart from rising prices for steel and lumber, raw materials and product pricing was generally stable.
Manufacturing
Reports from District factories generally show that production levels continued to increase during the past eight weeks and on a year-over-year basis, though by varying amounts. Some respondents attributed recent increases to seasonal factors. Most manufacturers are confident about near-term prospects and expect their sales to remain on a moderate upward trend. However, they do not expect a strong rebound to pre-recession levels this year, and a few anticipate a leveling off in new orders. Steel shipments remain on the upswing, with half of our contacts characterizing volume as better than expected. Rising volume is being driven by autos, energy, and construction equipment. Although some underlying uncertainty remains, there is a sense that the current level of business activity is sustainable, at least through the third quarter. District auto production was stable in April on a month-over-month basis, while year-over-year it rose substantially for both domestic and foreign nameplates.
A large majority of our contacts told us that their inventories are now well balanced, reflecting increased demand. Capacity utilization rates continue to improve, with a few reports indicating that it is now moving toward historical norms. Capital outlays remain at relatively low levels, and business owners are approaching spending decisions with caution. However, the number of respondents who plan on additional spending during the second half of 2010 has increased substantially since our last report. Several steel producers and service center representatives reported that they are beginning to see signs of a leveling off in steel prices. Nonetheless, a few manufacturers are contemplating, or have already put in place, higher product prices that reflect the rise in the cost of steel. Even though new hiring is limited, we heard numerous reports of recalling laid-off workers and increasing work hours. Wage pressures are contained.
Real Estate
In general, new home sales improved slightly during the past eight weeks and on a year-over-year basis. Our contacts tell us that the move-up and third-time home-buyer categories are gaining momentum, while activity by entry-level buyers is lessening. Homebuilders are not expecting a turnaround in the housing market this year, and they are concerned about the effect of foreclosures and real estate owned properties on housing inventories. Builders also reported that their current spec inventory is in line with market demand. Little change was noted in the list prices of new homes, and reports indicate an overall rise in construction material costs, especially for lumber. Skeleton crews remain the norm for general contractors and subcontractors.
Activity in non-residential construction continues to show signs of a pickup. Inquiries have improved, and many contractors said that their backlogs are higher than year-ago levels. Most projects currently under-way fall within the industrial and government-funded infrastructure categories. The glut in retail space shows no signs of diminishing. Almost all of our contacts are fairly optimistic in their outlook for the remainder of the year. Increased costs for construction materials were limited to steel and lumber. General contractors reported a small amount of seasonal and permanent hiring. While opportunities for subcontractors are beginning to improve, many of them are still struggling and taking on projects at cost.
Consumer Spending
In general, retail sales were stable or down slightly during April on a month-over-month basis and showed some improvement from year-ago levels. Although consumers continue to focus on buying necessities, retailers noted that they see a pickup in purchases of discretionary items, especially for those used in the home. Looking forward, retailers are cautiously optimistic, and most expect sales to show a slight improvement going into the third quarter. Vendor and store pricing has been relatively stable. Auto dealers saw new vehicle sales increase from mid-April through mid-May, when compared with the previous 30-day period, and on a year-over-year basis. Reported increases varied widely. Used vehicle purchases were characterized as doing well. Overall, dealers are cautiously optimistic and expect slow, steady sales growth through the summer months. Reports on vehicle inventories were mixed. Half of our contacts said they need more cars on their lots, while others noted that inventories are in line with sales. Contacts also said that buyers are finding it easier to obtain financing from banks, credit unions, and captive financing companies. Reports show little change in staffing levels at retailers or auto dealers.
Banking
The market for business lending remains soft, with most bankers reporting that demand for new loans is steady to down slightly. Interest rates were stable, although a few of our respondents noted that competition is putting downward pressure on their rates. On the consumer side, most bankers characterized loan demand as weak or flat. Those seeing a slight increase attributed it to draw downs on home equity lines of credit. The residential mortgage market continues at a slow pace, with several bankers noting that activity has diminished further since the end of the home-buyer tax credit. Core deposits continued to grow at most banks, while deposit rates remain low or fell further. Reports on the credit quality of loan applicants were mixed. Delinquencies were improving almost across the board, with the only problem areas continuing to be those related to real estate. Bankers expect that current credit standards will persist for the foreseeable future. Overall employment levels are stable, although two large banks reported some workforce growth.
Energy
Reports show little change in oil and natural gas production during the past eight weeks, with only a modest increase expected going into the summer. Spot prices for oil and gas are trending down. We heard mixed reports on coal output. One producer attributed very strong demand for metallurgical coal to the global upswing in steel production, while long-term expectations by electric utilities for flat demand and excess capacity is putting downward pressure on coal output. Prices for coal were mixed. In general, capital expenditures by energy producers are flat to down. However, two of our contacts said that they expect to increase capital outlays during the second half of 2010. With the exception of steel pipe, production equipment and materials costs were flat. Employment was steady, and little hiring is expected in the near future. Wage pressures are contained.
Transportation
Freight transport executives reported favorable volume trends, with corresponding gains in their bottom lines. However, profits remain below historical norms. Several contacts noted that the increased volume was above expectations. Most freight executives characterized their outlook as optimistic. Nonetheless, there remains some underlying concern about the sustainability of the recovery and credit availability for working capital. Several of our contacts noted that they are attempting to negotiate moderate rate increases, with some degree of success. They also reported a significant rise in the cost of packaging materials and much higher quotes for tractors and trailers to be delivered in the summer, which they attributed to new engine regulations. Major capital purchases remain at low levels. However, due to aging fleets and growing demand, the need to replace equipment may grow toward year-end. Current hiring is for replacement only. If volume continues to build, freight executives expect to add capacity in the near term.
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Philadelphia