July 25, 2007
Federal Reserve Districts
|Skip to content
Economic conditions improved in the Third District in June. On balance, manufacturers reported increases in new orders and particularly in shipments, although manufacturers of capital equipment saw reductions in both measures. Retailers experienced different conditions depending on the market segment they serve. Sales of high-end goods increased significantly, while sales of low-end merchandise remained flat or increased only marginally. Auto sales had increased over the past few months, while June saw significant declines with recovery expected in July. Overall bank lending rose only slightly, with residential and personal lending remaining flat and the commercial real estate sector seeing continued strong performance. Firms commenting on labor costs generally reported steadily increasing wages, but observations on nonwage benefits were mixed with some firms reporting acceleration and other reporting a slowdown in increases. Firms continued to report significant price increases for raw materials and energy.
Third District firms generally see business activity expanding in the second half of 2007, although bankers are less optimistic than in previous reports. Manufacturers plan higher levels of capital spending and expect more demand for their products in the months ahead. Retailers generally expect sales to increase at their current rate and the outlook from auto dealers has improved despite the slowdown in June.
More than half the manufacturing firms contacted for this report expect an increase in new orders and shipments over the next six months, with only a few expecting decreases. Expectations for overall business activity are upbeat, with nearly half expecting increases.
Contacts report that, while remaining at relatively low levels, second quarter auto sales were significantly higher than in the first quarter. June brought decreases in sales, particularly for domestic nameplates, but dealers expect July numbers to show a recovery. They point to the arrival of new incentives for domestics as contributing to their improved outlook. However, dealers continue to close and consolidate at a high rate.
Demand for residential mortgages also remained flat. Bankers noted that home equity borrowers almost exclusively sought fixed rate lines of credit, but that margins from the prevailing fixed rates are so low that there is little benefit to making the loans. Some bankers also reported that meeting lending targets for the year was no longer likely.
On a more positive note, other bankers reported that, in commercial real estate, the region is performing strongly, with delinquencies at low levels. Credit card lending also seems to remain a positive for the industry, with delinquencies and charge-offs still below historic trend levels. Investment companies reported continuing strong cash inflows to both equity and fixed income funds and other investment products.
In general, recent conditions do not seem to be as strong as they had been in the first quarter. It is, as yet, unclear whether or not this is the beginning of a trend or a temporary issue. Expectations were that downside risks for the industry are increasing rather than declining.
Prices and Wages
Most of the firms reporting on employment costs in July noted a continuing trend of moderate wage increases. Some noted that the rate of increase in wages and benefit costs appeared to be accelerating somewhat; however, others reported a slowdown in benefit cost increases.