July 30, 2003
Federal Reserve Districts
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Business activity in the Third District rose slightly in July. Manufacturers reported small increases in orders and shipments for the month after decreases in the previous three months. Retail sales of general merchandise picked up from June to July, although the year-over-year gain was marginal. Auto and light truck sales have been steady. Bank lending has been rising, with a slow advance in business lending and relatively stronger growth in consumer lending. Residential mortgage loan growth continued, but mortgage applications have begun to ease. Business at service firms has been mainly steady, although some companies have seen moderate improvement recently.
The outlook among contacts in the Third District business community is for steady or slowly improving conditions. Manufacturers forecast increases in shipments and orders during the next six months. Most of the retailers surveyed in July expect flat to just slightly higher sales in the second half of this year compared with the second half of last year. Auto dealers anticipate steady sales. Bankers expect continued slow growth in lending, but they are concerned that current levels of indebtedness will become troublesome for both businesses and households if economic conditions were to deteriorate. Service companies generally expect very slow growth during the rest of the year.
Looking ahead, manufacturers in the region anticipate improvement. Over half of the firms contacted for this report expect increases in shipments and orders, and only a few expect decreases during the next six months. Manufacturers anticipate some acceleration in sales growth during the second half of this year and the first half of next year. If these expectations prove correct, area manufacturing firms plan some increases in employment beginning in the current quarter and continuing into 2003. Capital spending plans among area manufacturers call for increases, on balance, in the next six months, but several firms indicated that they were more likely to implement capacity expansion next year rather than this year.
Most of the retailers contacted in July do not expect the recently implemented reductions in federal income taxes to have much impact on retail sales. Several store executives said the lack of improvement in employment was a more significant, and negative, influence on consumption spending than tax cuts. Most of the retailers surveyed for this report forecast flat to slightly higher sales for the second half of this year compared with the same period a year ago.
Auto dealers reported generally steady sales in July. The sales rate has been supported by manufacturers' incentives and dealers' promotions to clear out current-year models prior to upcoming new model introductions. Dealers expect sales to continue to run at about the current pace, which would result in full-year sales in 2003 about 5 to 10 percent below sales in 2002.
Most of the banks surveyed in June expect continued, although very slow, growth in total lending through the rest of the year. They see few signs that growth in business lending will accelerate significantly, and they expect a slowing in residential lending. While most said credit quality was not currently troublesome, some said any deterioration in business conditions could adversely affect credit quality in their commercial loan portfolios, and any further decline in employment could result in a rise in consumer delinquencies.
Stock brokers and investment management companies contacted in July generally indicated that individual investors have begun to step up purchases of equities and stock funds, although the increase has been moderate. While a shift away from bonds and toward stocks appeared to be taking place, some investment managers noted that their clients continued to focus on current income and were still favoring bonds, bond funds, and annuities over equity products.