March 5, 2003
Federal Reserve Districts
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The pace of business activity in the Third District was virtually steady in February, as some sectors improved slightly and others slowed. Manufacturers reported a small increase in new orders for the month compared with January, but shipments were flat and order backlogs declined. Retail sales of general merchandise and auto sales eased in February from January and from February of last year. Bank lending has been rising slowly, with most of the growth coming from consumer loans, although some banks reported recent increases in business lending. Commercial real estate market conditions have shown little change. Vacancy rates have been nearly steady, but effective rents have edged down. Residential real estate sales have been steady at a fairly brisk pace, and builders' backlogs remain high.
Looking ahead, contacts in the Third District business community expect some improvement, although they do not foresee a strengthening in growth. Manufacturers forecast some increases in shipments and orders during the next six months, but their level of optimism has waned somewhat since the start of the year. Retailers anticipate a slow improvement in sales, but they are being very conservative in their sales plans for the spring. Auto dealers expect a pickup in sales as winter comes to an end, but they do not expect to match last year's sales rate. Bankers expect slight gains in lending, but they have become increasingly concerned that loan growth could stall if the pace of business activity in the region does not improve.
On balance, the region's manufacturers forecast improvement during the next six months, although they have not been quite as optimistic recently as they were at the start of the year. About half of the firms surveyed in February expect increases in shipments and orders by midyear, but one-fifth anticipate decreases. Area manufacturers' capital spending plans call for increases, on balance, with about one in four scheduling increased outlays and one in ten planning cuts. Most of the firms that are limiting or reducing capital spending for 2003 indicated that they are doing so because demand for their products remains weak, but a significant number mentioned geopolitical uncertainties as a negative influence on their capital spending decisions.
Most of the retailers contacted for this report expect sales to move up sluggishly as the year proceeds. They are being very cautious in inventory planning, and many store executives said they will be trimming promotional spending, particularly for advertising. It appears that retail companies operating in the region will also reduce capital spending this year, but most of the store executives surveyed said the cuts will not be as large as they were last year.
Auto sales in the District slipped in February from the January pace, with declines for nearly all makes. Dealers reported that sales fell as some manufacturers scaled back incentives and dropped further when snowstorms disrupted travel in the region. Dealers said the outlook is uncertain. They expect sales to rise by the spring, although they anticipate results for this year as a whole will be below last year.
Bankers generally said there has been some slippage in credit quality recently among both business and consumer borrowers. Most of the banks contacted for this report said loan delinquencies have increased, but some noted that the increase in their charge-offs has been proportionately lower than the increase in their loan portfolio's delinquency rate.
Looking ahead, bankers in the Third District expect slow growth in total lending, at best. Some expressed concern that, unless the economic recovery picks up speed, growth in business and consumer lending will stall. Furthermore, several bankers said marginal borrowers are beginning to have difficulty servicing their current debt, and they anticipate more firms and households will experience financial pressure if business activity and employment do not improve soon.
Real Estate and Construction
Residential real estate agents and homebuilders generally reported steady rates of sales in January and February at a fairly strong pace. Price appreciation continued to be strong in many parts of the region, although instances of multiple offers have diminished. Real estate agents expect sales of new and existing homes for the year as a whole to be a few percentage points below last year's level. Builders reported little or no decreases in backlogs, which have been kept up by strong sales while construction has been delayed by adverse weather. Residential construction contractors generally indicated that land prices continue to rise, but materials and labor costs have been mainly steady.