November 27, 2002
Federal Reserve Districts
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Business activity in the Third District appeared to be advancing marginally in November. Manufacturers reported modest increases in orders compared with October. Retail sales of general merchandise have picked up from last month and from last year, but auto sales fell in October and remained steady at the slower rate in early November. Residential building and home sales remain strong, as does mortgage lending, but bank lending other than mortgages has eased, and commercial real estate markets remain soft.
The outlook in the Third District business community is positive, although there is a general feeling that economic growth is fragile and likely to remain so, especially as long as the international situation is uncertain. With respect to their own industries, business contacts generally expect moderate improvement. Manufacturers forecast increases in shipments and orders during the next six months, and they have scheduled increases in capital spending. Retailers expect slight year-over-year gains in sales for the holiday shopping period. Auto dealers expect sales to be steady near the current rate through the rest of the year. Residential builders forecast a continuing high rate of sales and construction activity. Bankers generally expect overall loan demand to remain flat, and commercial real estate agents see no signs of imminent improvement in commercial and industrial real estate markets.
The region's manufacturers forecast improving business conditions over the next six months. Just over half of the firms surveyed in November expect increases in orders and shipments during the next six months, while only one in 10 anticipate decreases in orders and even fewer expect shipments to decline. Area manufacturers' capital spending plans call for increases, on balance, and the number of firms that have scheduled stepped-up expenditures has increased somewhat compared with recent months.
Most of the retailers contacted for this report expect the current slow year-over-year sales growth to extend through the holiday shopping period. But they cautioned that military action or terrorism, should it occur, would probably keep shoppers out of the stores, at least temporarily, even during the normally busy year-end season. Despite their continuing efforts to contain costs, many retailers said they will hire their usual complement of seasonal employees.
Auto dealers reported a drop in sales in October. The slower pace appeared to be continuing in November, although the weekly sales rate was close to steady for most dealers. Dealers' inventories have increased, but most dealers expect to work them down if the sales rate remains level, as they expect it to, during the balance of the year.
Nearly all the banks surveyed reported compression in interest rate margins and reductions in deposit interest rates. Financial service companies have seen recent increases in sales of annuities as investors, especially retirees, look for higher returns while remaining reluctant to invest in equities.
Bankers in the Third District expect overall lending to remain flat as both businesses and consumers limit their borrowing. Several bankers noted that lower interest rates are unlikely to prompt additional borrowing while the economic outlook remains uncertain and the possibility of armed conflict in the Middle East persists.
Real Estate and Construction
Residential real estate agents and home builders generally reported steady rates of sales in October and early November. Price appreciation continued to be strong in many parts of the region. Builders and real estate agents expect a seasonal slowing of sales around the holidays, but they expect the underlying sales pace to remain robust into next year. Builders reported backlogs sufficient to maintain current rates of construction through most of the first half of next year at existing developments, and they are planning to begin new projects as well.