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Economic activity has advanced modestly in the Third District since the last Beige Book. Manufacturers, on balance, reported increases in shipments and new orders. Retailers posted sales increases from April to May. Motor vehicle dealers also indicated that sales increased. Third District banks reported mostly steady loan volume outstanding. Residential real estate agents and homebuilders said home sales increased from March to April but slowed in May. Contacts in the commercial real estate sector said leasing has picked up, but vacancy rates have not improved, and construction activity continued to be weak. Service-sector companies generally reported slight gains in activity. Business firms in the region indicated that prices of most goods and services have been steady, although there were increased reports of rising prices for basic materials, construction-related products, and shipping.
The outlook among Third District business contacts is positive but cautious, overall. Manufacturers forecast a rise in shipments and orders during the next six months, on balance. Retailers expect sales to expand modestly as long as overall economic conditions and the employment situation improve. Auto dealers expect the sales rate to increase somewhat in the months ahead. Bankers expect a slight increase in lending, mostly in commercial and industrial loans. Residential real estate contacts expect the pace of home sales to ease following the end of the federal tax credit for purchases. Contacts in nonresidential real estate expect leasing to increase slowly, but they do not expect any near-term gains in construction activity. Service-sector companies expect continued modest growth for the rest of the year.
Third District manufacturers reported increases in shipments and new orders in May, on balance. Compared with April, however, the number of firms recording rising orders declined somewhat, although the number of firms recording rising shipments increased. Among the major manufacturing industries in the region, increases in orders were more common for producers of lumber and wood products, industrial materials, and industrial equipment. In contrast, producers of apparel and electrical equipment reported mostly declines in orders. In general, manufacturers continued to describe the increase in demand for their products as slow. One manufacturer said, "Conditions have improved slightly," and another said, "Activity is showing signs of improving but at a slow pace."
Third District manufacturers expect business conditions to improve during the next six months, on balance, and the margin of positive opinions over negative opinions has been practically unchanged since the previous Beige Book. Among the firms surveyed in May, about half expect increases in new orders and shipments; a bit over one-tenth expect decreases. Capital spending plans among area manufacturers remain positive, on balance, but not strong. About one-fourth of the firms polled in May plan to increase expenditures for new plant and equipment, but one-half plan to maintain level spending, and nearly one-fifth expect to reduce spending.
Third District retailers reported increased sales in May compared with April and with May of last year. They said that spring apparel sales continued to rise and that sales of other lines of merchandise had begun to move up as well. Although some merchants cautioned that much of the year-over-year improvement in sales was a consequence of last year's poor results, most said the current trend in sales was encouraging. "It's definitely a better year than last," one retailer remarked, "and we are selectively expanding." Looking ahead, Third District retailers expect the sales trend to remain positive as long as overall economic conditions continue to improve.
Third District auto dealers reported a rise in sales in May compared with April and with May of last year. They said a shortage of popular models has limited the advance in sales, but they expect manufacturers to increase production soon. Dealers expect sales to continue to move up through the rest of the year.
Total outstanding loan volume at most of the Third District banks contacted for this report has been virtually level since the last Beige Book. On balance, commercial bank lending officers said there has been a small increase in business lending, some gains in residential mortgage lending, but a decline in consumer lending. Bankers generally reported that demand for business loans has been rising, although some noted that use of existing credit lines by many commercial customers has been less than expected. Contacts in the Third District financial community noted recent signs of increased interest in business lending by non-depository financial companies. Most of the surveyed banks indicated that credit quality measures have shown little change since the last Beige Book, although some noted slight improvement.
Looking ahead, Third District bankers expect modest loan growth. They generally expect gains in business lending. In contrast, several bankers said they expect a falloff in demand for residential mortgages and continued softness in consumer loan demand. "Individuals are still deleveraging and looking to build up cash reserves," one banker said.
Real Estate and Construction
Contacts in residential real estate markets reported increases in sales of new and existing homes from March to April as well as year-over-year gains for both months, but the sales pace slowed in May. The March-April results were fueled by the federal income tax credit for home purchases, according to contacts, and they expect the monthly sales rate to taper off. They expect some sales momentum for existing homes as recent homebuyers sell their current residences, but slower sales after that. Many contacts believe "we stole sales from the future," as one real estate agent said. Although builders reduced inventories of built homes in the past few months, they do not expect construction activity to pick up this summer. For both new and existing homes, contacts reported little change in prices compared with a year ago.
Nonresidential real estate firms indicated that vacancy rates in commercial and industrial buildings have increased slightly in most parts of the Third District in the past few months. Leasing activity has picked up somewhat, but effective rents have been steady to down as recently completed buildings have added to the supply of available space. Construction activity has been generally flat at low levels, according to contacts, although some reported increases in road building and publicly funded projects. Contacts expect leasing activity to increase slowly in the months ahead and rents to remain about steady. "It will not be a robust recovery," according to one contact whose opinion reflected the consensus. Building contractors and commercial real estate agents were in agreement that construction activity showed no signs of increasing in the near term.
Service-sector firms generally reported that activity has expanded slightly since the last Beige Book. Business services firms indicated that client companies in most industry segments have increased use of their services, with the exception of the construction industry, a sector in which a recovery has not yet occurred. Several business services firms reported increased interest in outsourced functions by companies in a range of industries as well as by state and local governments. Nearly all the services firms contacted for this report noted that the recent improvement has been slight. One contact said, "The growth is modest, and the year-over-year comparison is easy because business was very slow last year." Looking ahead, most of the services firms contacted for this report expect continued modest growth for the rest of the year.
Prices and Wages
Reports on input costs and output prices have been mixed since the last Beige Book, although there has been an increase in the number of reports of rising prices. Around 40 percent of the manufacturing firms polled in May noted increases in the costs of the commodities they use, and 50 percent reported steady input costs. Manufacturers continued to report rising costs for metals and metal products, and they also reported increased costs for lumber and chemicals. Most manufacturers said they have not raised the prices of the products they make, although some producers of lumber and wood products, metals, and electrical equipment have raised prices. Construction firms noted increases in the costs of lumber, drywall, oil-based products, and some metal products. Retailers reported mostly flat selling prices. However, they noted increases in the cost of cotton goods and international freight rates. Auto dealers said vehicle selling prices have moved up, particularly for used cars.
Business firms in the region reported a slight increase in hiring, on balance, but no significant changes in wages since the last Beige Book. Several firms noted that recent increases in business activity have prompted them to consider increasing staffing levels sometime this year. Employment agencies reported strengthening demand for temporary workers and a slight increase in demand for permanent employees.