Beige Book Report: Philadelphia
August 2, 1988
The Third District economy is continuing on a moderate expansionary trend in July. Manufacturing activity is growing modestly and area firms are adding to payrolls. Retailers report a slight pickup in sales after a May-June lag, and auto dealers say sales are running above expectations. Bankers report that demand for business loans improved in June and is continuing to grow in July, but they say consumer loan growth is being maintained only by easier credit terms. Home equity lending remains strong, however. Bankers also note a pickup in deposit growth during June extending into July that is easing pressure on their cost of funds.
Most business contacts in the Third District lock for a continuation of current trends through the end of the year. Manufacturers forecast further expansion in the next six months, and they plan additions to payrolls and increases in capital spending. Retailers expect sales in the second half to slightly exceed the same period last year. Domestic auto dealers believe sales will remain strong through fall but import dealers fear price increases will result in a year-to-year drop in sales. Bankers see the region's expanding manufacturing sector bolstering business loan demand but they expect little growth in consumer lending.
Manufacturing
The region's industrial sector remains on an upward path, according
to the latest Business Outlook Survey. Twenty-nine percent of the
firms participating in the July survey said business improved from
the prior month, while only 5 percent indicated that business had
slowed. Both durable and nondurable goods producers are experiencing
moderate growth. On balance, area manufacturers report increases in
new orders that are being matched by higher shipments, leaving order
backlogs virtually unchanged. Delivery times were increasing
marginally in July, reflecting a step-up in the volume of business,
but a slight inventory buildup indicates that area firms are more
than able to met rising demand for their products. Employment
remains healthy; although most firms are holding payrolls steady,
one-fifth of those surveyed in July were adding workers.
Price pressures in the industrial sector show no signs of abating. Half of the firms polled in July report higher input costs and one- fourth are raising prices on their own products. Looking to the future, 87 percent of the survey respondents expect to pay more for the goods they purchase in the next six months, and 65 percent plan to charge more for the products they make.
Looking ahead, area manufacturers see a continuation of current trends. Overall, firms polled in July expect business to expand further during the next six months. They forecast gains in orders and shipments, and some firming in order backlogs as well. On balance, survey respondents are planning to boost capacity over the next six months by hiring more workers and investing more in plant and equipment.
Retail
Third District retailers contacted in the second half of July
reported a slight improvement in sales continuing from June. Based
on comments from store officials, the current sales rate is running
around 5 percent above the year-ago pace, in dollar terms. Hot
weather has boosted sales of seasonal items, including summer
apparel, according to local merchants. However, they also say they
have been making more extensive price reductions in recent weeks in
order to stimulate sales. The strong demand for seasonal goods end
consumer response to discounts are bringing inventories down to more
satisfactory levels.
Looking ahead, most retailers in the Third District say current trends give them no cause for pessimism, but they remain cautious in planning for the fall. The local consensus is for second half results somewhat above last year's. However, merchants say they are prepared to cut prices and cancel orders if there are early signs that consumer spending this autumn will be below their forecasts.
Auto dealers report a pickup in sales in June that has carried into July. Sales are currently running above their expectations, and dealers attribute much of the gain to manufacturers' rebate programs. Domestic auto dealers are optimistic that sales in 1988 as a whole will exceed 1987 sales. Import dealers indicate that foreign manufacturers who have not yet raised prices to fully compensate for the dollar's decline may do so later this year, and they believe this year's sales could fall below last year's as a result.
Finance
Loan volume at major Third District banks increased in June and
bankers contacted in July generally report further growth in most
categories of lending. Bank loan officers say commercial and
industrial lending has been accelerating and is likely to remain
healthy for the near future. Demand for consumer credit is not
strong, although home equity loans are still popular; nevertheless,
area banks have been able to increase installment lending by
offering more attractive credit terms. Growth in real estate
lending, while still at a healthy pace, continues to taper off, and
bankers see this trend continuing.
Deposit growth at major Third District banks picked up in June, and bankers say this growth was being maintained in July. In particular, demand deposits appeared to be reversing the year-over-year decline of the last eight months. Bankers indicate that growing demand for business loans in combination with increased deposit growth is bolstering net interest margins.