‹ Back to Archive Search

Beige Book Report: Philadelphia

January 28, 1987

The Third District economy appears healthy, although growth in several sectors has slowed recently. Manufacturing activity was only steady in January, following six consecutive months of expansion. Retail sales during the holiday shopping season met merchants' plans, which called for modest year-over-year gains, and they have been enjoying a healthy rate of sales since Christmas. Automobile sales were high in December but low in January. Total loan volume at major Third District banks was growing slowly as 1986 came to a close, although real estate lending remains strong.

Expectations for the Third District economy are generally positive. A majority of manufacturers polled in January predict steady or improving business during the first half of the year. Retailers also expect a good year, but express some concern that consumer debt burdens could limit discretionary spending. Automobile dealers say it will be several months before the slack following the December rush of car sales is reversed. Bankers expect business lending to parallel moderate economic growth in 1987, but they believe consumers will not be willing to add much to their current debt levels.

Manufacturing
After posting six consecutive monthly gains, the Third District manufacturing sector is pausing in January, according to the latest Business Outlook Survey. Overall, business is running at a steady rate in both the durable and non-durable goods sectors. While firms reporting improved business in January edged out those reporting slower business, they did so by only a slim margin. This lull is reflected in most measures of industrial activity. New orders are up fractionally, but shipments, order backlogs, and inventories are virtually unchanged. Employment is also at a standstill.

Industrial prices in the area are mostly stable; 80 percent of the firms contacted in January said both input and output prices were unchanged from December. However, 15 percent noted increased costs for the goods they purchase, and 12 percent charged more for their own products.

In their outlook for the first half of 1987, local manufacturers have mostly positive views. Forty-three percent of the January survey respondents expect continued growth and 38 percent anticipate steady conditions; only 15 percent forecast a slowdown. Overall, survey respondents expect increases in orders and shipments. They remain cautious, however, and are planning no changes in either employment or capital spending schedules during the next six months.

Retail
Retailers generally made their modest Christmas sales targets, averaging 4-5 percent over 1985, after a late burst of buying. Year- over-year gains varied widely by type of store, however. Specialty retailers recorded the best increases, with sales at some stores up around 10 percent from the previous year; general merchandise stores posted gains at the lower end of the scale. Clothing and housewares were the best performing product lines. Going into the holiday season, inventories were leaner than in previous years; thus, retailers did not resort to unplanned markdowns despite the slow start of Christmas buying. Store executives contacted in January said their inventory-to-sales ratios remain about where they want them. Automobile sales were strong in December as buyers took advantage of the expiring sales tax deduction, according to dealers.

Retailers are optimistic that the healthy rate of sales so far in January indicates a good year ahead. However, some express concern that discretionary spending could lag, as consumers make payments on automobiles and other high-priced merchandise purchased late in 1986. Automobile dealers reported a sharp slowdown in sales in January, which they attribute to the shifting of purchases into 1986; they do not expect sales to pick up for several months.

Finance
Total loam volume at large Third District banks edged up slightly during the first three weeks of December, and near the end of the year stood approximately 15 percent above the December 1985 level. Real estate lending is especially robust, and commercial lending is also strong. Bankers say loan demand in these categories was high near the end of the year due to tax changes which became effective January 1. Lending officers expect commercial and industrial loam demand to grow this year at nearly the same rate as it did in 1986, provided the economy does not weaken. But bank profits may come under pressure despite a healthy economy. Although still a minority, an increasing number of Third District banks say their net interest margins may shrink this year as a result of increased competition in lending to the middle market and a slowdown in deposit growth.

Growth in consumer loan volume at major Third District banks tapered off during 1986, and near the end of the year consumer credit outstanding was approximately 10 percent above the December 1985 level. This is a continuation of a trend to slower growth in consumer lending that began in the second half of 1985. Local bankers generally believe that consumers are approaching the limit of their willingness to add to debt burdens. Nevertheless, home equity lending appears to be increasing, prompted by the new tax law and strong promotion by banks. A significant portion of this new lending reflects consolidation of bank and merchant credit card debt, however.

Real Estate
Commercial and residential real estate markets in the Third District are active, and most real estate contacts expect healthy conditions in 1987. Demand for office space continues to absorb new construction; new buildings are substantially pre-leased, especially in the Philadelphia and Wilmington central business districts. There is more slack in suburban areas, and leasing activity is expected to decline somewhat this year in these outlying markets. For industrial properties, realtors forecast stable or slightly easing demand this year.

Residential real estate activity is strong. The average rate for 30- year fixed rate mortgages has fallen to around 9 percent in the region, and realtors say this enables a substantial number of buyers to afford homes for the first time. Consequently, sales and prices rose throughout 1986, and realtors expect this trend to continue. However, builders note increasing resistance to higher prices for newly constructed homes. One large mortgage lender is predicting a 10 percent decline in housing starts in the region this year, but most builders think this is an overly pessimistic view.