October 19, 2005
Federal Reserve Districts
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Economic activity in the Third District advanced slowly in September. Manufacturers reported a slight increase in shipments during the month but a steady rate of new orders. Retail sales of general merchandise rose from August to September, but year-to-year gains were modest for most stores. Auto sales fell in late September and remained slow in early October. Banks and other lenders reported that lending continued to move up in September, but many said loan growth had slowed. Service firms generally indicated that their business activity has been expanding at a steady, moderate rate. Business contacts in all industries expressed concern about rising energy costs and price increases in general. The number of firms reporting pressure on profit margins, primarily from rising energy and material costs, has increased. Many firms are looking for ways to reduce energy expenses but most have not yet made firm plans to implement any energy-saving measures.
Third District business contacts generally expect business activity in the region to continue to expand, but several expect growth in the fourth quarter to be slower than in the third quarter. Manufacturers expect business to pick up from the September pace, but not strongly. Retailers anticipate slow growth and difficulty meeting fourth-quarter sales targets. Auto dealers expect slow sales in the months ahead. Bankers anticipate continued growth in lending, but many expect the pace of loan growth to ease. Service firms expect activity to advance at about its current rate through the rest of the year.
Overall, manufacturers expect growth in business activity to pick up in the months ahead. About one-third of the firms contacted in September expect their shipments and orders to increase during the next six months, and one-fourth expect decreases. Capital spending plans among District manufacturers call for stepped-up expenditures, on balance, but in September the number of firms scheduling increased outlays remained somewhat lower than in the first half of the year.
Slow sales of fall apparel have left some stores with large inventories, and they have stepped up price reductions and added sales events to their calendars for October. Looking ahead, most retailers in the region expect sales growth to be slow through the rest of the year. Some said they expect their fourth-quarter results to fall short of plan unless consumer confidence improves.
Auto dealers in the region reported a sharp drop in sales as manufacturers' discount programs ended in September. Inventories of 2005 model year vehicles were nearly depleted, except for large sport utility vehicles. Dealers reported a sharp decline in demand for these vehicles. Dealers said sales of new model year vehicles have been slow, and they expect sales for the fourth quarter to remain well below the pace achieved in the first three quarters of the year.
Investment companies reported steady overall cash inflows in recent weeks. They indicated that inflows to money market funds have increased substantially and inflows to bond funds have risen somewhat, but inflows to equity funds have eased. Investment company officials said investor confidence appears to be stable, although both individual and institutional investors have been reluctant to increase the portion of their investments allocated to stocks or long-term bonds.
Wages and Prices
Third District firms in all industries contacted for this report said the costs of their inputs have been rising, and many said the rate of increase has accelerated recently. Firms reported rising prices for a range of basic materials, petroleum-based products, and energy. Firms that purchase large quantities of motor fuels and other energy products have begun to make more use of hedging, and some have instituted other measures to control current and future energy costs, including negotiating long-term and bulk purchase contracts. Trucking firms said fuel costs have reached record highs and they have raised fuel surcharges to their customers. Expectations of further price increases are widespread, and the number of area firms that have raised, or plan to raise, prices for their own goods and services has increased. Executives at many Third District firms say the costs of the goods and services they purchase are rising more rapidly than official price measures. One contact said his firm is developing a cost index to replace the consumer price index for automatic price escalation in long-term contracts.