Beige Book Report: Philadelphia
October 27, 1987
Business conditions, overall, are improving modestly in the Third District in October. Manufacturing continues to expand, maintaining the trend that began in the second quarter. Industrial employment has been moving up in recent months and the October increase, as reported in the Third District survey, represents a new high for the current expansion. The retail and financial sectors also show improvement, although slowdown in their growth is evident. Retailers say sales in early September met planned year-over-year increases of 5-10 percent, although growth has eased somewhat since then. Third District bankers report increases in most categories of lending, but say only real estate loan demand is heavy. The volume of business and personal loans, while still moving up, is not advancing as strongly as in the first half of the year.
Views of the future are mixed, but mostly positive. Manufacturers generally expect growth to continue at its current pace, but they plan only small increases in capital spending and no changes in employment levels. Retailers believe sales this fall will be slightly ahead of last year, but concern is growing that Christmas sales may show little improvement over 1986. Bankers expect real estate loan demand to remain strong through next spring, and they believe business lending will grow moderately if interest rates stabilize, but they say consumer loan volume will only edge up in the months ahead.
Manufacturing Industrial activity in the region is continuing the upward trend that began last spring, according to the latest Business Outlook Survey. Thirty-five percent of the area manufacturers participating in the October survey report an increased rate of production compared to last month, while only 3 percent indicate their business is slower; 60 percent are operating at a steady pace. Conditions are similar in the durable and nondurable goods sectors.
All measures of manufacturing activity indicate growth this month. New orders and shipments are increasing, order backlogs are rising fractionally, and inventories are being trimmed. Employment indicators are giving their highest readings since the early months of the current business expansion. Although most survey respondents report steady payrolls and working hours, 23 percent are adding workers and 30 percent are increasing hours.
Industrial prices in the area continue to drift upward, with half of the October survey respondents noting higher input costs compared to last month, none reporting lower costs, and about half indicating no change. For their own products, 80 percent are holding the line, and 20 percent are raising prices.
Looking ahead, area manufacturers have mostly positive views. Forty- one percent foresee continued growth during the next six months, 44 percent anticipate steady business, and only 12 percent expect a slowdown. On balance, survey respondents forecast further gains in new orders and shipments, but they expect order backlogs to decline somewhat. Local firms project virtually no change in employment or working hours during the next two quarters, although they plan modest increases in capital spending. On the price front, 72 percent of the survey participants expect to pay more for purchased goods over the next six months, and nearly half plan to hike charges for their own products.
Retail
Third District retailers generally report that sales were good
during the early September back-to-school shopping period, with most
stores meeting their sales targets. However, some store officials
noted that gains slackened in the latter half of the month. Year-
over-year increases for September as a whole averaged 5-10 percent,
in dollar terms. Upscale stores are experiencing better sales growth
than other outlets, a trend that has characterized Third District
retailing for much of the year.
Merchants contacted in early October think sales for the rest of the fall will probably run about 10 percent higher than last year. However, some believe that the colder than normal weather in early October will boost sales of fall clothing, possibly driving total sales above expectations. Although most retailers say it is too soon to forecast the Christmas shopping season, one store executive reports that current opinion in the industry is that the year-over- year gain will be slight.
Finance
Most categories of lending at major Third District banks are
growing, but the rate of increase is slackening, continuing a trend
to slower growth that set in at the beginning of the year. Local
bankers say commercial and industrial loan volume is increasing
moderately and that home equity lending is expanding, although the
volume of other types of consumer credit is virtually flat. One real
estate lending is increasing at a strong, steady rate.
Commercial bank credit officers believe current trends in loan demand will continue for at least another quarter. While growth in commercial and industrial loan demand is slowing, bankers say good business conditions in the region should sustain volume in this credit category. However, lending officers say business loan demand will drop substantially if rates move much higher. Bankers do not believe consumers will add significantly to present indebtedness unless economic growth accelerates. They say real estate lending should grow strongly through next spring because home builders in the region have a backlog of sales commitments for new houses yet to be built.