September 8, 1987
The Third District economy is showing signs of moderate expansion in August. Manufacturing activity expanded and factory employment has increased for the second month in a row. While reports from retailers vary, most are satisfied with the year-over-year gains they have achieved this summer, and auto sales, although down from last year, have picked up in recent weeks. Commercial bankers indicate that business and real estate lending is growing, but consumer lending has slowed recently. Realtors say commercial markets are generally healthy but residential sales have declined as fewer houses are coming on the market. Both residential and nonresidential construction are slowing from the substantial pace set in the last few years.
The outlook in the Third District business community is for further modest growth. Manufacturers expect expanding activity, although they are not planning major increases in payrolls. Retailers are cautiously optimistic for fall. Commercial bank credit officers foresee steady growth in business lending but expect consumer loan volume to remain relatively flat. Commercial realtors believe the new office space coming on line in the next few years will be absorbed without seriously weakening the market.
Manufacturing
The region's industrial sector is making gains, according to the
latest Business Outlook Survey. Nearly 39 percent of the local
manufacturers polled in August reported that business picked up from
July, only 7 percent noted a slowdown, and 55 percent said they were
operating at a steady pace. Durable goods producers and non-durables
goods makers reported similar business conditions.
Most measures of industrial activity were giving positive readings in August. New orders and shipments rose, and delivery times increased fractionally for the first time this year. Employment posted another gain in August, building on July's increase. Although 79 percent of the companies reported steady payrolls, 17 percent added workers, while only 4 percent made cuts. Local manufacturers' order backlogs did not share in the general improvement, however, remaining virtually unchanged from July, overall. On the price front, most of the August survey participants are holding the line for their own products; and, although 37 percent say prices for purchased goods have gone up since July, 61 percent reported no change.
Looking ahead, local manufacturers have mostly positive views. Forty-two percent of the August survey respondents predict improvement over the next six months, 39 percent expect steady conditions, and 20 percent anticipate a slowdown. On balance, area industrial companies foresee increases in orders and shipments, but they do not expect order backlogs to grow; and, despite recent gains in employment, survey respondents are not planning for further significant changes in payrolls. With regard to prices, nearly two- thirds of the respondents predict a further rise in input costs over the next six months, while only about one-third plan to raise the prices of the goods they make.
Retail
Sales reports from Third District retailers in late August varied
from "extraordinarily good" to "below plan," although few merchants
expressed disappointment with results for the summer as a whole.
Most product lines are performing well, but store officials say the
late date for Labor Day this year appears to be delaying back-to-
school purchases. Store officials say they are guardedly optimistic
for the balance of the year, and most will enter the fall with
relatively lean inventories. They expect consumers to put off
Christmas shopping until late, a practice that has taken hold in
recent years.
Automobile dealers say sales for the year so far are below last year's pace, with the exception of a few popular models; but increases in gross revenue (total sales less cost of cars) have helped to keep dealer net profits from slipping as much as unit sales. Sales have picked up in recent weeks in response to the latest round of manufacturers' financing incentives.
Finance
Loan growth at major Third District banks continues to moderate.
Growth has been slowing since February, and in early August total
volume outstanding was approximately 7 percent above the year-ago
level. Real estate lending remains strong, but growth in commercial
and industrial lending has been moderating, and consumer lending has
actually declined. Personal loan volume outstanding in the first
week of August was nearly 2 percent below the peak level in May.
Bank lending officers say consumer installment lending, in
particular, has been declining.
Commercial bank credit officers expect business lending to grow moderately over the next few months, and some believe faster growth is likely with improving conditions for the region's manufacturers. All are in agreement, however, that competition in middle market lending is strong and that net interest margins will remain under pressure as more regional banks focus on this market and reduce their participation in loans to larger borrowers in the national market. For consumer lending, there is a consensus that little growth can be expected; bankers generally believe consumers will bring their spending into line with personal income and make fewer credit purchases in the near future.
Real Estate and Construction
Although commercial construction in Delaware is declining sharply as
the state's recent office building boom passes its peak, commercial
construction and leasing is healthy in most parts of the Third
District. Several new office buildings have been completed in the
Philadelphia central business district this year and more are
scheduled for completion over the next three years. Realtors say the
new buildings are being leased relatively easily. Older buildings,
however, are losing tenants at a rate that slightly more than
offsets increases in occupancy of new buildings, resulting in a
small increase in the total office vacancy rate. Nevertheless, most
realtors believe the new space coming on the market in the next
three years will be readily absorbed and that overall vacancy rates
will not rise to glut proportions.
In Third District suburban areas office vacancy rates are stable or declining as leasing activity picks up and construction slows down. Following on office and residential development in the suburbs, hotel and retail space is now in demand. Realtors say recent and prospective completions of major highway links in the suburbs are boosting interest in all types of commercial real estate in these areas.
Contractors in some parts of the Third District say housing starts have fallen due to labor shortages, with the number of skilled framers, carpenters, and construction superintendents in particular falling short of demand. Residential building permits have been declining in Pennsylvania and New Jersey, but have risen substantially in Delaware. Residential realtors say sales of both new and existing homes are tapering off as fewer houses in both categories are being put on the market. They report that selling prices continue to rise.