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Economic activity in the Fourth District has been stable since early April. Factory output and shipments by steel producers were steady to increasing. Production at auto assembly plants rose slightly. The housing industry remains weak, with little expectation of improvement for the remainder of the year. Commercial building contractors reported steady business activity, although there is some concern about weakening backlogs. Sales by District retailers were flat to improving. Bankers reported that lending standards continue to tighten, though credit remains available. Demand for business loans was mixed, while lending to households has weakened. Energy production was stable, and the demand for freight transport services was flat.
On balance, employment levels were largely unchanged across the District. Several contacts reported modest wage pressure. Staffing firms saw little net change in the number of job openings, while the number of job seekers increased. Job vacancies were greatest in health-care-related fields. A significant rise in commodity-based input prices was reported across the board.
Manufacturing
Output by District factories was stable to increasing during the past six weeks. Reports of increased production were attributed primarily to seasonal adjustments or rising demand by customers in energy-related industries. On a year-over-year basis, reports were evenly split between production slowdowns and increases, with only one company experiencing a significant increase. The outlook of manufacturers is best described as guarded, with several contacts noting a softening in demand. Steel shipments were stable to increasing for producers and service centers. The strongest end markets for steel include energy and heavy equipment manufacturing. Contacts expect steel demand to remain at current levels or decrease slightly during the third quarter. District auto production showed a slight uptick in April on a month-over-month basis. Output by domestic nameplates increased, while their foreign counterparts showed a small decline. In terms of year-over-year comparisons, auto production was down appreciably.
For the most part, capital spending remains on plan, with little change expected in the
upcoming months. Reports of decreased capital expenditures were tied to lower sales forecasts. Although standards have tightened, access to credit is not an issue for manufacturers. All our contacts reported substantial price increases for raw materials, especially metals and petroleum-based inputs. In response, over two-thirds of our contacts either raised their product prices or increased surcharges. Further, most contacts are considering additional price increases in the near future if input costs continue to rise. Those manufacturers who did not raise prices sell primarily to the housing industry. About a third of our respondents said they had recently hired a small number of workers, some on a temporary basis. Other manufacturers noted that they had increased overtime in place of new hiring. Wage pressures are not a major issue at this time, though many respondents expressed concern about rising health care costs.
Real Estate
New home sales were flat to declining, while inventory levels remain high. Even though there has been a slight pickup in traffic, almost all home builders expect no improvement in the housing industry for the remainder of 2008. New home prices have been relatively stable since our last report, though discounting has increased. Accounts of dramatic increases in steel, concrete, and fuel costs were widespread; in contrast, lumber prices were stable. Several general contractors reported reductions in staff and that subcontractors are readily available at competitive rates.
Commercial contractors said that business has been steady over the past six weeks, with several noting an increase in activity on a year-over-year basis. However, several builders mentioned that backlogs are weakening. Further, owners and developers are finding it more difficult to obtain project funding due to stricter credit standards. Most contractors experienced a rise in the cost of materials, especially for steel and concrete. Workforce levels remain largely unchanged.
Consumer Spending
District retailers reported flat to improving sales across all segments since our last report. However, our contacts are very cautious in their outlook for the third quarter, with the majority expecting sales to be relatively flat. Reports from auto dealers showed that new and used car sales across the District were mixed, while purchases of SUVs and trucks declined. Dealers anticipate little change in sales during the coming weeks. In general,
vendor price increases were limited to food items, paper products and fuel surcharges. Most retailers have passed these increases through to their customers. Capital expenditures remain on plan, albeit at reduced levels compared to 2007. Employment growth is limited to staffing new stores.
Banking
Demand for commercial and industrial lending was mixed. Segments showing strength include commercial real estate and small business loans. Consumer loan demand has weakened, especially for autos. Nonetheless, a few contacts noted a pickup in home equity lines of credit. Most respondents experienced a slight increase in delinquencies. An uptick in home mortgage originations was attributed to seasonal factors and is not seen as the beginning of a trend. Bankers told us that credit is available, though lending standards continue to tighten. Reports on core deposits were mixed. Employment levels across District banks showed a small net decline, and a few bankers are experiencing modest wage pressures.
Energy
On balance, there has been little change in oil, gas and coal production. However, energy producers reported a pickup in oil and gas drilling. Looking forward, almost all our contacts told us they expect to see a rise in production activity. Reports indicate that spot and contract prices have increased across the board. In general, equipment and material costs, especially fuel, were on the rise. Capital expenditures were on plan or slightly higher than projected, with half of our respondents telling us they expect to increase the number of capital projects during the next few months. Employment levels increased slightly, and producers are looking to expand payrolls. However, many of them told us that it is difficult to attract qualified workers, which is contributing to some upward pressure on wages.
Transportation
Freight transport has been flat since our last report, with volumes running below available capacity. Most carriers expect current market conditions to continue into the second half of 2008, with some modest improvement toward the end of the year. All our contacts noted a significant jump in fuel prices, which they were largely able to pass through via a surcharge. Freight pricing remains competitive; however, as excess capacity is removed from the system, some contacts believe prices will begin to strengthen. Capital expenditures were reported to be somewhat below projected plans. Carriers expect that future expenditures will not
increase until freight volumes start to pick up. Hiring was limited to driver turnover, and no change in wages was reported.
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