November 28, 2001
Federal Reserve Districts
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Business conditions in the Third District remained soft in November. Manufacturers reported continuing declines in shipments and orders. Retail sales of general merchandise have been improving slowly week by week, but are still below year-ago levels. However, auto sales have been running at a very high rate, boosted by manufacturers' incentive financing. Bank loan volumes have declined in the major credit categories: business, consumer, and real estate. Commercial real estate markets have eased. Home sales rose during October and November, but appear to be off from the same months last year. Firms in a variety of industries in the region have announced layoffs and hiring freezes, but the pace of job cuts does not appear to be accelerating.
The outlook in the Third District business community is generally subdued. Manufacturers predict an upturn by the middle of next year, but in other sectors forecasts are less optimistic. Retailers expect sales for the holiday shopping period this year to be below last year's level, and they are concerned that sales might remain weak into the spring of next year. Auto dealers expect a large drop in sales in the first quarter of next year, as consumer demand ebbs and manufacturers' zero-interest rate financing ends. Bank credit officers expect commercial and industrial lending and consumer credit demand to remain soft, and they expect a drop in real estate lending. Contacts in the real estate industry forecast easing rents and rising vacancy rates in commercial markets and some falloff in the rate of home sales. The general opinion is that the decline in real estate and construction activity will be modest.
Local manufacturers have slightly trimmed their forecasts lately. Just over half of the firms surveyed in November forecast increases in orders and shipments during the next six months, but some firms that had previously anticipated a relatively quick upturn now expect business to be flat through most of the first half of next year. On balance, area firms have cut back capital spending plans, but they do not plan to reduce employment from current levels.
Area retailers expect sales for this year's holiday season to be below last year's. They expect extensive promotions and marketing efforts will be required to make their sales goals, and they are concerned that profits will suffer as a result. Retailers suggested that sales in December and January will be crucial to their plans for the spring. If holiday sales are significantly below current expectations, retailers will cut back orders for merchandise, advertising expenditures, and expansion plans.
Auto sales in the region have been very brisk, in response to manufacturers' zero-interest rate financing. Dealers expect sales to fall off sharply in the first quarter of next year as consumer demand becomes sated and manufacturers' incentive-financing programs end. Dealers have been limiting their orders to manufacturers in anticipation of the drop in sales.
Bankers in the Third District expect business loan demand to remain soft until there are clear signs that business conditions are improving. They expect demand for new homes to fall, and some are limiting their lending to building contractors. Bankers expect consumer lending to expand slowly as retail sales regain some lost ground.
Real Estate and Construction
Residential real estate agents gave mixed reports. Sales to first-time homebuyers have been resilient, but sales of high-priced homes have eased. Some contacts in the real estate industry also noted a falloff in sales of homes and townhouses in senior citizen communities. Homebuilders reported that sales picked up in October after a sharp drop in September. The higher rate of sales appeared to be persisting in November, but not increasing. Builders have raised prices for homes in most price ranges except the very high end, where demand has eased. Real estate agents and builders indicated that relatively low mortgage interest rates have encouraged first-time homebuyers, and move-up buyers are looking more favorably on house purchases as investments. Real estate agents expect an easing in the sales rate, but not a sharp drop unless employment in the region falls more sharply.