September 5, 2007
Federal Reserve Districts
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Business activity expanded in the Third District in August, although the pace of expansion appeared to ease somewhat. Manufacturers, on balance, reported increases in new orders and shipments, although the number of firms reporting increases declined from a month ago. Retailers generally reported year-over-year gains in August in line with previous months, although some stores had weaker than expected sales. Auto sales improved slightly from July to August but remained below the level of a year ago. Overall bank lending rose slightly, with gains in business and personal lending, but residential mortgage activity declined. Residential real estate demand has weakened considerably since our last report, but demand for commercial real estate has remained strong. Firms reporting on labor costs generally noted moderate, steady rates of increase in wages, but several said increases in non-wage benefits costs were large. Firms reported increases in input costs and output prices in August, although the extent of the increases did not appear to have changed much since July.
Third District firms generally foresee continued growth in the next few months, although several contacts said they expect the rate of growth to ease. Manufacturers expect some increases in demand for their products in the months ahead, and, except for some manufacturers of building products, they have plans to increase capital spending. Retailers generally expect sales to increase at their current rate. Auto dealers are not certain of the near-term outlook, although they expect sales for the year as a whole to be below those of last year. Bankers anticipate further growth in business and personal lending, albeit at a slower pace, but they expect residential mortgage lending to decline. Home builders and residential real estate agents expect sales to remain slow. Most contacts in commercial real estate anticipate continued strong demand for office and industrial space, but several contacts believe office construction activity could decline late this year and into next year.
Half the manufacturing firms contacted for this report expect increases in new orders and shipments over the next six months, and only a few expect decreases. Firms in most of the major manufacturing industries in the region have scheduled increased capital spending in the next six months, although makers of wood and metal products have trimmed planned capital expenditures.
Auto dealers in the region generally reported a slight pickup in sales from July to August, but they are uncertain that the higher rate of sales will continue. Most expect sales for this year as a whole to be below those of last year. Foreign makes continued to have better year-over-year sales comparisons than domestic makes, and dealers believe reorganization and other managerial changes at domestic manufacturers could hamper marketing efforts and limit possibilities for increasing sales of their vehicles. Consolidation and closings of dealerships continue, mainly for domestic makes.
Contacts in secondary debt markets reported a sharp drop-off in demand for collateralized debt obligations in mid-August affecting securities backed by residential as well as commercial real estate debt. Contacts said that concern about underlying credit quality has risen among investors in collateralized debt obligations. However, some contacts reported that further decreases in prices would probably prompt purchases of secondary market securities that can meet more critical scrutiny for risk. Despite any possible improvement in secondary markets, however, most contacts do not expect the residential mortgage origination business to rebound soon.
Real Estate and Construction
Commercial real estate firms report that office vacancy rates in the region have continued to decline over the past several months, and rental rates have increased. Demand for office space has grown as firms in the region have expanded. Although new buildings have added to available space, conversion of older buildings to other uses has removed some space from office markets.
Construction is up in many office markets in the region, on both a build-to-suit and a speculative basis. Industrial real estate firms report that overall demand for industrial space remains strong. Vacancy rates have moved down and rents have risen moderately. Construction of industrial buildings has increased. Looking ahead, some contacts in the commercial real estate sector are not certain that construction of commercial buildings will continue to rise, but several contacts indicated that they expected public infrastructure construction to pick up, mainly for roads and bridges and for utilities.
Prices and Wages
Most of the firms reporting on employment costs in August indicated a continuing trend of moderate wage increases. Several firms noted that increases in benefit costs continued to be large, although not accelerating. Nevertheless, employers in the region said they were continuing to look for ways to reduce benefit costs.