July 31, 2002
Federal Reserve Districts
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Business activity in the Third District edged up in July. Manufacturers reported increases in shipments and orders, but the improvement was not as extensive as it had been in the past few months. Retail sales of general merchandise were virtually steady in July and up slightly from the same month last year. Auto sales picked up a bit as manufacturers renewed incentives. Bank loan volumes moved up marginally, mainly because of some growth in consumer and real estate lending. Commercial and industrial loan volume has been flat. Investment companies in the region reported an increase in transfers from stock funds to money-market funds by individual investors in mid-July.
The outlook among Third District businesses contacted in July is for further, although modest, improvement. Manufacturers forecast increases in shipments and orders during the next six months, and they are planning increases in capital spending. Retailers expect steady sales for the rest of the summer. They are generally optimistic about the back-to-school shopping period, but express some concern about the effect of financial market conditions on consumer confidence. Most of the auto dealers surveyed for this report anticipate steady sales for the rest of the year, although some expect a slowdown. Bankers expect slow growth in overall lending, with further gains in consumer lending and some strengthening in loan demand from businesses.
Area manufacturers continued to reduce inventories in July, on balance, although half of those contacted for this report said they were maintaining steady inventories. A large majority of manufacturers indicated that prices for both inputs and the goods they manufacture were steady in July, but reports of higher prices for steel were widespread. Rising health care costs continue to be a concern for manufacturers as well as other employers in the region.
The region's manufacturers forecast better business conditions during the rest of the year despite the recent easing in the rate of improvement. Over half of the firms surveyed in July expect increases in orders and shipments during the next six months, while few anticipate decreases. The region's manufacturers have raised capital spending plans, on the whole. In particular, higher outlays for new plant and equipment are scheduled for the second half among producers of basic metals, electrical equipment, and industrial materials and machinery.
Auto dealers said sales in July picked up slightly with new manufacturers' incentives, although the annual rate of sales remains below last year's pace. In general dealers said their inventories were at appropriate levels.
Retailers expect sales to remain steady through the rest of the summer and pick up for the back-to-school season. Store executives expressed guarded optimism for the fall. They believe the course of retail sales will depend largely on overall economic conditions, but some are concerned that financial market turmoil could lead to a pullback in consumers' willingness to spend. Most auto dealers expect sales for the rest of the year to be steady at about the current rate, but some anticipate a slowdown toward the end of the year, and they note that manufacturers appear to be trimming production plans.
Bankers in the Third District expect overall lending to continue to grow slowly this year. They anticipate a modest pickup in business lending and continuing growth in consumer lending. However, some bankers expressed concern that consumers are building up unsustainable debt burdens, and they expect an easing in personal loan growth and some deterioration in personal credit quality later this year. Several bankers also indicated that they expect the level of residential lending to ebb.
Investment companies contacted in mid-July reported that they were experiencing high levels of activity from individual investors switching out of domestic equities. A few firms indicated that a small number of investors were closing accounts entirely, but the overwhelming majority of customers were moving into money-markets funds. There also appeared to be a minor movement into foreign stock funds and small-cap value funds. Investment companies expect some diminution in their revenues as more funds go into money-market funds with lower fees than stock funds.