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Beige Book Report: Philadelphia

June 21, 1989

Indications from nearly all sectors of the Third District economy surveyed in June reveal little, if any, growth in recent weeks. Manufacturers report that both new orders and production activity have been virtually steady since April. Retailers say current dollar sales are generally running just even with the pace of last spring. Bankers indicate that growth in loans and deposits continues, but at a slower rate since May than in the first four months of the year. Realtors say that home sales in April and May were very sluggish but appear to be picking up with the recent drop in mortgage rates; however, commercial real estate markets are beginning to show signs of weakening.

The consensus outlook for the region's economy is for stable conditions, at best, through the summer. Manufacturers forecast steady to slightly slower activity for the second half of the year, and they are planning cuts in employment and smaller increases in capital spending. Retailers expect sales in the second half to run even with or fall below the current pace, in real terms. Bankers expect slower growth in loan demand from both businesses and consumers and they plan to reduce commercial real estate lending as well.

Manufacturing
Third District manufacturers contacted in late May and early June generally report that business continues to run at an even pace, as it has since April. Just over half of the firms surveyed indicated steady business as June began and the rest are evenly divided between those noting a pickup since May and those for whom business slowed. While the overall picture is one of no change, durables producers are experiencing a drop-off in activity while nondurables producers are seeing some improvement.

Firms in the region have seen a leveling off in the rate of new orders in the past few weeks, in contrast to the steady growth they had been experiencing, and order backlogs are falling as shipments continue on an upward trend. Nevertheless, inventory reduction, which had been reported for several months, appears to have stalled in June. Despite these indications of slackening demand for manufactured goods, industrial firms in the region are maintaining employment levels, although working hours are being trimmed at some plants. On the price front, increases in input costs are noted by nearly half of the companies contacted for this report and about one-quarter are raising the prices of their own products. These indications of price increases are not quite as widespread as they had been earlier this year.

Looking ahead, sentiment among Third District manufacturers is widely divided but, overall, slightly negative. On balance, managers at area plants forecast slower business during the second half of the year, with new orders running just steady and shipments declining as order backlogs are worked down. In line with their forecasts of reduced output, local firms plan to trim payrolls and working hours somewhat by year-end, and they intend to reduce inventories as well. Capital spending plans still call for increased outlays over the next six months, on balance, but compared to reports over the last twelve months, fewer firms are boosting spending and more are cutting back on plans.

Retail
Third District merchants generally report that sales in May were only about even with the same month a year ago, in dollar terms. Although women's apparel sales continue to improve, sales in most other lines of goods are disappointing. Discount stores are achieving somewhat better results than other types of stores, but nearly all retailers contacted in early June describe consumers as cautious and reluctant to step up spending. Auto dealers have seen sales slip despite manufacturers' incentives, and many dealers are cutting back on orders to the factories in an effort to keep inventories under control.

Retailers expect a soft unmet, and some predict that the year-over- year gain in unit sales for the second half will drop below the increase posted in the first half. For 1989 as a whole, area merchants are in agreement that sales will increase by only a few percent above 1988, in dollar terms. With expectations receding, retailers are trimming inventories, cutting orders, and holding the line on hiring.

Finance
Total loan volume at major Third District banks in mid-May was approximately 11 percent above the year-ago level as growth eased from the 13 percent year-over-year gain for the first quarter. Lending to both businesses and consumers continues to increase, according to bankers contacted in early June, but they note some slackening in the upward pace and they expect further slowing of growth in these loan categories in the second half. Real estate lending remains fairly strong, with rising commercial construction loans making up for slower growth in residential mortgage lending. Bankers say concern for credit quality in commercial real estate is growing, however, as rents and occupancy rates appear to be declining, and they expect to cut back on commitments for commercial real estate financing in the months ahead.

Deposit growth at major Third District banks has slipped in the past month, according to bankers, but not by as much as asset growth has, so bankers generally do not express concern about gathering funds. Demand deposits declined for most banks in May, and bankers attribute this to consumers shifting to interest-bearing accounts in response to the first quarter increase in interest rates and to increased use of cash management services by corporate customers. Time deposit growth is described as healthy. Several banks are promoting certificates of deposit, especially in 9-month to 2-year maturities, and they are gaining significant deposits with rates of up to 10 percent for the 2-year term.

Real Estate and Construction
In most areas of the Third District, realtors say sales of residential properties are running well below last year's pace and price appreciation is only marginal. The usual spring upturn in sales did not materialize this year, according to realtors surveyed in early June, but some note signs of a pickup with the recent drop in mortgage rates. Nevertheless, some realtors say sales will not regain much strength because would-be first-time home buyers are hampered by an inability to make the typical 20 percent downpayment, despite having incomes that would qualify them for substantial monthly payments.

Commercial real estate in the Third District is also showing some signs of softness. Office occupancy rates remain fairly healthy in the Philadelphia central business district, according to realtors, but plans for several major new buildings have been postponed. In the suburbs, vacancy rates are rising for both office and retail space, but construction has not slowed significantly. Industrial construction contracts awarded since April have fallen below the first quarter rate, according to builders, but remain above the value of contracts let during the spring of last year.