September 22, 1999
Federal Reserve Districts
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Business conditions in the Third District were improving moderately in September. Manufacturing activity was advancing. Retail sales rose for the back-to-school period, although price discounting appeared to increase. Auto dealers said sales have been steady and at a good pace. Bank lending has been growing, mainly because of increases in credit extended to small businesses, but overall loan growth has been slow. Commercial and residential real estate markets are generally strong, but some signs of easing have been observed in demand for office space and sales of existing homes.
Expectations are positive but modest. Manufacturers forecast continued growth near the moderate pace set in recent months. Retailers anticipate steady or slightly growing sales. Bankers expect some gains in business and consumer lending but anticipate an easing in real estate lending. Contacts in real estate and construction have mixed views. Most forecast steady conditions, but some believe residential and commercial markets will soften, especially if interest rates move up.
Looking ahead, the region's manufacturers foresee growth in shipments and orders continuing at about the current rate. On balance, they expect to step up capital spending in the next six months but keep inventories at current levels. Managers at area plants expect to boost employment somewhat, but they are not scheduling increases in working hours.
Auto dealers reported a steady rate of sales in recent weeks. Luxury sedans and light trucks have been selling well, but sales of small cars have lagged. Manufacturers' incentives remain widespread. Inventories were said to be at desired levels for most dealers, although shortages of some popular models were reported.
Bankers in the region expect business and consumer lending to grow moderately for the rest of the year. Business expansion plans and consumer confidence levels are underpinning this growth. On balance, bankers anticipate some slowing in real estate lending as more cautious lending criteria are applied.
Real Estate and Construction
Although most contacts in commercial property markets expect conditions to remain healthy through the rest of this year and next, there are some signs that demand for space may be peaking. Rents have leveled off in some areas where they had been rising. Several large corporations have recently negotiated sale/leaseback contracts. Commercial real estate agents say this is an indication that owners of buildings believe their values will level off or decline.
Home builders in the Third District generally reported a steady rate of sales in recent weeks. For some builders, labor shortages, especially of carpenters, have resulted in construction delays. Building materials appear to be in adequate supply, but prices have been rising. Builders have been raising selling prices in an effort to maintain profit margins. Real estate agents said sales of existing homes have eased from the pace set in the summer but remain at a good level. Increases in mortgage interest rates have damped sales activity somewhat, more noticeably for homes in the lower price ranges. Some real estate agents noted a recent easing in the rate at which selling prices have been appreciating, which they also attribute to the rise in mortgage costs. These contacts said home sales will decline further if mortgage interest rates continue to climb.