November 30, 2005
Federal Reserve Districts
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Economic activity in the Third District grew slowly in November. Manufacturers reported increases in shipments and new orders during the month. Retail sales of general merchandise were on the rise, but year-to-year gains were slight for most stores and some had declines. Auto sales rose in November, following a drop in October. Bank loan volume was roughly steady. Commercial real estate markets have tightened, but residential real estate activity has eased. Business contacts in all industries noted continued rising costs and growing pressure on profit margins.
Third District business contacts generally expect business activity in the region to continue to expand, although slowly in some sectors. Manufacturers expect business to pick up from its November pace, and they are scheduling increased capital outlays. Retailers anticipate modest year-over-year gains for the holiday shopping period, but they expect sales growth to be difficult to sustain next year. Auto dealers say the outlook is uncertain. Contacts in commercial real estate generally expect further declines in vacancy rates and some firming in rents. Residential real estate agents and home builders anticipate a slight slowing in sales and a moderation in the rate of home price appreciation next year.
Overall, manufacturers expect growth in business activity to pick up in the months ahead. Half of the firms contacted in November expect their shipments and orders to increase during the next six months; less than one-fifth expect decreases. Capital spending plans among District manufacturers call for stepped-up expenditures, on balance, and the number of firms scheduling increased outlays has increased somewhat since the summer.
Area manufacturers noted continuing increases in input costs and output prices in November. Over half of the firms surveyed reported higher costs for the goods they purchase, and one-third raised prices for the products they make. Almost none indicated declines in input or output prices. Looking toward next year, about three-fourths of the manufacturers polled in November expect further increases in costs for energy, raw materials, and intermediate goods, and about nine-tenths expect increases in health benefit costs and wages. Energy costs and health benefits are expected to rise more rapidly than other expense categories.
Auto dealers in the region reported a gradual improvement in sales of both automobiles and sport utility vehicles in November, following a drop in October. Inventories were not considered excessive, but most dealers believe manufacturers' discounts will be needed to prevent the sales rate from faltering. Dealers say the outlook for sales this winter is uncertain and will depend crucially on manufacturers' pricing, the price of gasoline, and the level of consumer confidence.
Real Estate and Construction
Residential real estate agents and homebuilders generally reported a slowing in sales in October and November compared with the pace set earlier this year. Some real estate contacts noted that the number of existing homes for sale has risen recently and the number of offers per house has declined. Nonetheless, real estate agents said many sellers do not seem inclined to accept less than their asking prices. Homebuilders and real estate agents expect sales next year to be below this year's level by a few percentage points, and they expect price appreciation to moderate significantly.
Builders reported rising prices for a variety of construction materials and some difficulty in obtaining sufficient supplies of certain items, such as plastic pipe and roofing materials. Some builders also noted that wages and subcontractors' charges have risen.