|
Economic activity in the Fourth District continued to be weak. Steel producers and other manufacturers have seen no improvement. Layoffs have continued, and wage growth has slowed. Retailers reported flat sales on average. Commercial construction is flat. On the other hand, there have been some positive developments. Bankers are beginning to see an increase in loan volume, and residential construction is booming.
Industrial Activity
Manufacturing layoffs have continued even though many companies indicated that they are holding on to high-skilled workers despite the slack workload. To cope, some plants are offering workers voluntary time off, and overtime is authorized only when necessary to meet an order deadline. Basically, manufacturers are waiting for orders to pick up. Manufacturers generally remain optimistic that orders will rebound later in the year, but, being saddled with more capacity on hand than they require for current orders, they are reluctant to undertake any investment that would expand capacity until additional orders actually come in. One contact in machine tools manufacturing, a key component of capital goods, reported that his customers were starting to at least consider making purchases again, but he has yet to see a rebound in orders.
Shipments of flat-rolled steel hit their lowest level since 1992 in the first quarter of 2001. Contacts were most concerned with low prices, which they attributed to excess capacity and cheap foreign imports. Most mills are focused on reducing working capital and costs and plan no major capital spending for this year. High-performance specialty steel for aerospace, oil and gas, and electrical machinery is a rare bright spot in the industry. Demand from this market segment is expected to remain strong over the next few quarters.
Consumer Spending
Consumer spending appears to have been mixed in March and early April. For retailers, large markdowns during the first two months of the year appear to have reduced excess inventories. These markdowns have now ended, and contacts are pleased with the volume of sales for new spring merchandise, but the increase is believed to be seasonal and not necessarily a sign of a better economic climate. In contrast, non-apparel sales were generally unfavorable across the board. Computer and other electronic retailers reported a large decrease in sales.
On the positive side, auto dealers reported that their sales were much better in March and April than at the beginning of the year. On average, car sales for March are about the same as they were for March of last year. However, truck sales, both new and used, have done very poorly this year. Sales have been dependent on dealer incentives; the best selling models tend to be the ones with the most generous incentives. Overall, contacts observed that inventories have returned to a more desirable level.
Labor Markets
The labor market in the District has continued to soften. Hiring has eased, layoffs have increased, and wage growth has been muted. The hardest hit sector appears to be manufacturing. One employment agency manager stated that no one is hiring temporary workers and that many of his customers are even laying off regular employees. In fact, some contacts expressed feeling that conditions for temporary workers were worse than February, which had been described as "dismal." Other contacts reported that February appeared to be the trough, and, while things are not getting better, they have not gotten any worse during March and early April.
Organized labor contacts reported either no change or only slight increases in wages in March and early April. Wages for temporary workers, which may be more attuned to instantaneous market conditions, are said to have been flat or, in some cases, falling over this period.
There are a few signs that conditions may begin to improve. One contact noted that the automobile industry layoffs that occurred from late December to early February had been "small and targeted" and may be, for the most part, finished. As evidence, he noted that some laid-off employees already have been recalled and that overtime has picked up.
Construction
Conditions in the commercial building sector remained stagnant into early April, as many firms have reportedly put expansion plans on hold indefinitely. One builder noted that not only are firms not building, they are not even seeking quotes or estimates as would be typical at this time of year. The only positive for commercial builders is that cost pressures remain muted for labor and materials.
In contrast, District homebuilders reported a significant improvement in their economic circumstances. One homebuilder reported selling more homes in the first quarter than in any other first quarter in his nearly 25-year history in business. Other homebuilders echoed these remarks, noting that their first quarter sales were also as good as or better than those of the first quarter of 2000. Builders credited the strong market to lower-end and mid-range homebuyers, who appear to be taking advantage of lower interest rates. Margins have remained steady, with land and lumber prices flat to falling and labor available.
Banking and Finance
Fourth District bankers have seen some signs of improvement, reporting that the demand for both consumer and commercial loans has begun to pick up. Lenders believe that lower rates are allowing some borrowers to refinance existing loans and other borrowers to take out new loans. However, in communities where layoffs from local steel companies and other manufacturers are most keenly felt, consumer loan demand is still weaker than this period last year.
Only one bank tightened its lending standards from March to mid-April; the rest reported that their standards were unchanged. Delinquency rates have increased slightly, but not at an alarming rate. Agricultural lenders noted that farmers are keeping current on their payments, but they are not making large capital expenditures or requests for loans.
Trucking and Shipping
Trucking companies are performing slightly worse than at the beginning of the year, while other shipping companies, such as air and boat freight, are performing slightly better. Most contacts reported that volumes were 5 to 10 percent lower from March to early April than over the same period last year. Many have cut current and future capital and equipment purchasing plans, while others merely have no plans to increase capital spending or purchase equipment.
Shippers generally do not expect a significant increase in activity until August or September at the earliest. They reported that higher fuel prices and clients' credit difficulties are growing industry problems.
Agriculture
The winter wheat crop appears to be developing well, and yields are expected to be above average. Cold and wet weather has temporarily delayed planting of spring crops in most areas of the District. As a result of high natural gas prices, the price of nitrogen fertilizer has sharply increased, causing some farmers to cut back on its use and accept lower yields. High fuel prices are also a concern.
|
Philadelphia