June 14, 2006
Federal Reserve Districts
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Overall economic conditions in the Third District improved in May. Labor markets tightened. Manufacturing increased during the month, although the pace of growth eased. Retail sales of general merchandise rose, and the year-to-year gain improved compared with April; however, auto sales declined. Bank lending has been increasing, although demand for residential mortgages has softened. Residential real estate activity slowed, but commercial real estate markets continued to firm.
Third District business contacts generally expect business activity in the region to continue to expand at a moderate rate, but they anticipate further slackening in auto sales and residential real estate. Manufacturers expect the rate of growth to pick up during the second half of the year. Retailers anticipate steady gains in the next few months, although for the longer term they are concerned that if interest rates and gasoline prices remain at current levels or increase, this will dampen consumer spending. Auto dealers expect sales to remain sluggish through the rest of the year. Banks anticipate a moderate increase in business and personal lending, but they forecast a further decline in mortgage lending for home purchases. Contacts in residential real estate expect home sales and construction to fall further this year. Contacts in commercial real estate foresee an increase in demand for office and industrial space, but they expect construction to ease.
Overall, manufacturers expect the pace of growth to improve in the months ahead. Half the firms contacted in April expect their shipments and orders to increase during the next six months; about one-fourth expect decreases. On balance, capital spending plans among District manufacturers call for modest increases in expenditures.
Auto sales in the region declined in May, compared with April and with May of last year. Dealers said foreign models continue to have better year-to-year sales comparisons than domestic models, and that luxury car sales have been propped up by an increase in leasing. Inventories were held in check because dealers have limited orders to manufacturers. The consensus among auto dealers in the region is that sales will be sluggish for the rest of the year.
Bankers in the District expect continued growth in business and consumer lending
in the months ahead but foresee further weakening in residential mortgage lending.
Commercial bank loan officers contacted for this report generally indicated
that credit quality remained good for both consumer and business loans. However,
some bankers expect some borrowers to face repayment difficulties if interest
rates continue to rise.
Residential real estate agents and homebuilders generally reported a slowing in sales in May, compared with the pace set earlier this year and with sales in May of last year. Real estate contacts noted that the number of existing homes for sale and the time they are on the market have continued to increase. Homebuilders and real estate agents expect sales this year to be lower than in 2005, and they expect price appreciation to slow significantly. Although home builders and real estate agents described the slowdown in sales as gradual in most parts of the region, they indicated that sales of homes in resort areas have declined sharply.
Prices and Wages
Employers in a range of industries reported that labor markets remain tight, and college placement offices generally indicated that recruiting activity picked up this year compared with last year. Most area firms indicated that wage and salary increases implemented recently have been slightly greater than they were last year. Employers reported having greater difficulty filling positions requiring skilled labor and for some professional specialties, and they have raised salaries more for these workers than for others. Employers also noted an increase in quit rates as employees are finding higher-paid positions easier to obtain. In some parts of the region seasonal jobs have been difficult to fill, and wages for these jobs have increased significantly compared with a year ago.