The State of Manufacturing

Business in Review March 2007

Revenue reports from the First District – Boston suggest some softening since January with most retailers saying that revenues were down from a year ago. The Second District – New York reports that the expansion of economic activity has been essentially well-maintained; however there were scattered signs of deceleration since the last report. Consumer prices remained relatively stable, and input price pressure appeared to be unchanged. There was however some indication that wages were accelerating.

Manufacturer reports are generally mixed with New York Manufacturers indicating that activity has rebounded in recent weeks and are expressing optimism about the near-term outlook. One surplus and salvage store reported that sales had “not been good at all” with January being one of the worst months in the last five years. Fuel prices and the weather were cited as possible contributing factors. An auto-dealership association said that sales continued to be “absolutely awful” and many dealers were just “trying to hold on,”

Inventory levels are generally tending to be up because of the unexpected downturn in sales. Several retailers reported having to reduce headcounts with one reporting “enormous” wage pressure. Remaining cautious about capital spending; reports tend to be mixed.

First District manufacturers and related services providers reported mixed results for late 2006 and early 2007. They report that weakness in the residential construction, automotive, and semiconductor sectors is causing sales and orders for plastics, home equipment and furnishings, and certain other equipment categories to be flat or down from the year earlier. Most indicated that metals and energy costs generally have stabilized or have come down from the most recent peaks, but some firms remain concerned that energy price levels remain high, causing continued surcharges.

Most manufacturers expected that their U.S. employment levels would hold steady or decrease in 2007. Many firms are planning the addition of product development and sales positions while they continue to cut back on production and back office positions and favor filling these positions through outsourcing or relocation offshore. Finance, supply management, and machinist positions are reported being the toughest to fill. Average merit pay increases are expected to be typically in the range of 3.5 percent to 4 percent, which is the same or slightly higher than in 2006. On the whole, very few manufacturers are planning to undertake any significant domestic capital spending project this year.

Retailers reported that sales were generally on plan in January and early February, with same-store sales running about 3-6 percent ahead of year-earlier levels. Prices for comparable items had not changes significantly to impact these results. However, some retailers noted a continuation in the trend in the mix of goods sold to more upscale lines. This may be the result of an extensive use of gift cards in January

Retail inventories were said to be in relatively good shape. One retailer noted that sale gains were stifled by a relative lack of clearance merchandise. A Siena College survey of New York State residents indicated that consumer confidence rose for the fifth month in a row, reaching its highest level since late 2000, while the Conference Board survey of Middle Atlantic residents showed consumer confidence edging up in January but remaining modestly below last October’s cyclical peak.

Housing markets continue to be mixed. New Jersey homebuilders reported that the market for new homes, while remaining soft, is beginning to show sign of stabilizing. Builders had reported to have had to scale back construction plans and have had to move inventories by reducing prices and offerings concessions. In other areas outside and adjacent to New York City, the market is reported to be fairly resilient.

The market for existing housing has also been mixed, with continued sluggish demand for single-family units. Buffalo area Realtors reported that both sales and prices for single-family homes were running below year-earlier levels in January, although a pickup in sales and a slight rise in prices ware noted in the Rochester area. More generally, single-family home prices across the District are reported to be steady to slightly lower than a year ago.

Small to medium-sized District banks reported decreases in demand for all types of loans – particularly home mortgage, where 52 percent of bankers reported decreased demand. A substantial fraction of bankers reported tightened standards for all categories of credit – particularly in the commercial mortgage categories – while virtually none reported eased standards. They reported a modest increase in rates on consumer loans, but steady loan rates in other categories. While it was reported that there was a modest increase in delinquency rates on residential mortgages there appeared little or no change in delinquencies on other categories. Average deposit rates increased during this same period.