Beige Book Report: Philadelphia
August 9, 1989
Economic activity in the Third District is easing, according to indications from businesses surveyed in July. Manufacturers reported a drop in business for the month. Retailers said sales were flat compared to last year and auto dealers indicated sales were running below the year-ago pace. Bankers said that loan growth for the second quarter eased from the first quarter's pace and appeared to be slowing further in July. Despite the slackening pace of business, employment in most industries remains healthy. Many firms indicate they are raising wages for entry-level employees in the face of a shortage of qualified workers; however, there are not widespread plans to boost payrolls further.
Looking ahead, the consensus opinion in the Third District business community is that business with be steady or slightly slower for the rest of the year. Manufacturers expect activity to stabilize at about its current pace. Retailers expect real sales in the second half to run about even with or slightly below the rate of the sane period last year. Auto dealers anticipate a further decline in sales but not a substantial drop-off. Bankers expect loan growth to slacken as the economy slows somewhat and as banks tighten credit standards for real estate lending.
Manufacturing
Manufacturing activity in the Third District showed signs of slowing
in July, according to companies polled during the month. Nearly one-
third of the manufacturers surveyed said activity was declining,
while half reported steady business, and the rest indicated some
improvement from June. Firms in nearly all the goods-producing
industries in the region contacted in July indicated that business
was off from June.
On balance, area firms were receiving fewer orders for their products in July than they did in June, and order backlogs were declining significantly as local companies stepped up shipments. Overall, area manufacturers said inventories remained level, with little change since April. Measures of employment were mixed: area firms were adding marginally to payrolls in July, but they were trimming the workweek. Industrial companies reported paying higher wages for new employees, both production workers and professional personnel. On the price front, area manufacturers continue to report more increases than decreases; however, the incidence of price hikes—for either inputs or outputs—appears to be declining.
Looking to the future, the balance of opinion among Third District manufacturers is that business will stabilize at about its current pace for the rest of the year. They expect new orders to run at a steady rate into the beginning of next year, but they anticipate further declines in order backlogs. Despite signs of slower business, area firms intend to maintain current employment levels and working hours, and they plan to boost capital spending, on balance, over the next six months.
Retail
Third District retailers contacted in July said sales for June and
July were about even with the year-ago pace, in dollar terms.
Merchants say women's apparel is selling above last year's rate,
while appliances and other big-ticket items are weaker. Discount
stores are achieving somewhat better results than other types of
stores, and merchants describe shoppers as very price-conscious and
selective with regard to the quality of merchandise they are buying.
Nearly all store executives contacted in July said inventories were
at planned levels. Many retailers report they are having difficulty
finding entry-level employees although plans to increase staffing do
not appear to be widespread.
Overall, retailers say real sales in the second half of the year will probably run about even with or slightly below the same period last year. Many merchants are trimming orders for fall merchandise although women's apparel retailers are preparing for continued improvement in sales.
Third District domestic auto dealers contacted in July said both unit and dollar sales were running slightly below the pace of last year. Foreign auto dealers are achieving somewhat better sales (in unit and dollar terms) than they did last summer. All dealers report a continuing squeeze on profit margins due to higher car and parts prices from manufacturers and rising costs for financing inventories. Locally, domestic car dealers report inventories ranging up to twice desired levels.
Finance
Total loan volume outstanding at major Third District banks in early
July was approximately 9 percent above the year-ago level, as the
pace of growth in lending continued to ease from the rate set in the
first quarter. Growth in business and consumer lending has slowed
significantly in recent months. Real estate lending has remained on
a strong upward trend during this same period but bankers contacted
in late July said they have been booking less real estate credit in
recent weeks compared to the buildup in real estate loans earlier
this year.
Third District bankers generally expect loan demand to weaken in the second half in all credit categories in response to slower economic growth and tightened credit standards, especially for real estate loans.
In general, bankers indicate that deposit growth is in line with asset expansion plans, but net interest margins are under some pressure because loan rates have declined while relatively high rates are still being paid on certificates of deposit booked earlier this year.