Beige Book Report: Philadelphia
November 1, 1989
Economic conditions in the Third District vary among sectors, with overall activity apparently flattening out from growth earlier this year. Manufacturers indicate continued declines in business, with new orders and backlogs edging down, leading area firms to trim employment. Retailers report just steady sales in recent weeks, overall, with gains in apparel sales being offset by weakness in hard goods. Automobile dealers are experiencing a drop-off in sales following strong results during the model-year closeout period. Bankers report that lending has advanced in all categories.
Expectations in the Third District business community, on balance, are that activity will be relatively flat well into next year. Manufacturers generally anticipate a bottoming out of the industrial downturn during the next six months, but they do not foresee a significant rebound. Retailers express some optimism that sales will be good during the holiday shopping season but they expect dollar sales in 1990 to run just even with this year's pace, at least through spring. Automobile dealers expect a lower sales rate for the rest of this year and all of next year. Bankers expect personal lending to slow as consumption spending, especially for automobiles and other durables, flattens out. They also anticipate a significant slowdown in real estate lending as they reduce commitments to commercial developers and as long-term, nonbank financing becomes more difficult to obtain, as well.
Manufacturing
Manufacturing activity in the Third District continues to decline,
according to local firms contacted in late September and early
October. This marks the fourth consecutive month in which
manufacturing contacts report slowing business, on balance. The
slowdown is predominantly affecting durable goods producers while
nondurable goods makers generally indicate they are operating at a
steady rate. Overall, half of the local manufacturers contacted
recently said business was stable while nearly 3 in 10 said business
was falling off and only 2 in 10 noted improvement.
In the region's manufacturing sector as a whole, shipments were running at a steady rate; however, new orders were falling slightly, leading to a drop in order backlogs. In line with the slackening order situation, delivery times were being reduced, continuing a trend that began in January. On the employment front, two-thirds of the firms polled for this report were holding payrolls steady. On balance, however, both workers and hours were being cut in October.
Industrial prices in the region are moving up but at a slackening pace, according to local manufacturers. While increases are still noted, three-fourths of the firms responding to recent inquiries said prices of both the goods they purchase and the products they make were stable. In general, indications of price increases in the region's goods-producing sector have been fading since January.
Looking ahead, managers at plants in the region say the current business downturn could end within the next six months. Nearly 4 in to of those contacted for this report said business should stabilize over the winter, and the rest were about evenly divided between those expecting activity to turn up and those anticipating further deterioration. On balance, Third District manufacturing executives foresee a level rate of new orders and marginal gains in shipments. Nevertheless, area firms plan further cuts both in employment and in working hours and they foresee no changes in the rate of capital spending.
Retail
Retail sales in the Third District were running at just a steady
pace overall in early October, according to local merchants, with
results varying among types of stores and goods. Discount stores
were making better year-over-year gains than department stores and
apparel sales were described as good, but other specialty merchants
said sales results were falling below expectations. In particular,
electronics and consumer durables were weak.
Third District merchants have generally positive expectations for sales during the holiday season. They anticipate a fairly healthy improvement in sales for the period, compared to last year, despite lackluster current performance. For next year, however, they are not so optimistic. Most expect little or no gain over 1988 sales, in dollar terms.
Automobile dealers in the Third District report that sales in September and October slumped after a strong summer. Both domestic and import dealers indicate that buyers took advantage of model- year-end incentives and that 1990 models have not been selling well. The consensus among area dealers is that sales in the last quarter of this year and all of 1990 will run below the rate of the last two years. Dealers, whose profit margins have been squeezed all year, are stepping up cost-cutting efforts, and some have started laying off employees. Inventories are described as under control as a result of the clearing out of 1989 models and restrained ordering of 1990 models.
Finance
Total loan volume outstanding at major Third District banks in
September stood around 14 percent above the year-ago level as a
result of strong growth in most types of lending. According to
lending officers at commercial banks, business lending gained in
September from loans to management buyouts of units of large
corporations and from mergers and acquisitions among middle market
companies. Bankers said this type of financing was still active in
October, despite the uncertainties in financial markets.
Lending to consumers has advanced strongly at area banks since July, fueled by indirect auto lending and home equity loans, according to bankers. Other kinds of personal lending, such as credit card and installment loans, have not been gaining as vigorously. Consequently, bankers expect growth in personal loans to ease if the recent drop in auto sales becomes a trend.
Real estate lending continued on a strong upward trend in September but bankers contacted in October said they do not expect this growth to continue. Some said they have cut down sharply on commitments for construction loans recently and others noted that real estate developers are starting to experience difficulty in obtaining the nonbank financing that is usually required to complete the funding for development projects.