Beige Book Report: Philadelphia
January 24, 1990
Economic conditions in the Third District were mixed as the new year began. Manufacturing continued on the slackening trend that began in mid-1989. Retailers achieved modest gains in unit sales for the Christmas season although price discounting was widespread. Overall loan volume at major banks was growing fairly steadily, but commercial and personal loan demand appeared to be easing somewhat and banks were implementing more conservative credit standards.
The outlook in most sectors of the region's economy is for very modest expansion. Among manufacturers, positive views for the first half of the year barely exceed negative expectations. Retailers generally see unit sales through the winter running little better than even with the year-ago pace. Bankers expect loan growth to continue in most credit categories, but at a slower rate as economic growth slows and more restrictive credit standards are applied.
Manufacturing Manufacturing activity in the Third District in early January continues to fall. In nearly all of the industries surveyed, firms reporting slower business edged out those posting gains.
Some measures of business conditions indicated improvement, but the region's goods-producing sector remained soft overall. For example, area manufacturers indicated that new orders were rising slightly as the new year began, but the order rate was lagging behind shipments, leading to a drop in order backlogs. Local firms have been reporting shrinking order books since mid-1989. Lagging demand for manufactured goods is reflected by shorter delivery times as well, according to managers at area plants. The slackness in the manufacturing sector also appears to be bringing some stability to industrial prices; two-thirds of the firms surveyed said input prices were steady from December into January, and three-fourths said they were holding prices constant for the goods they make. As area firms adjust production to the slow growth in orders, they are generally allowing inventories to decline; and, while most are holding employment steady, some are trimming payrolls.
Looking ahead, area manufacturers have mixed views, although slightly more firms expect improvement than anticipate further slowing in the first half of the year. On balance, managers at area plants expect marginal gains in new orders. They expect to step up shipments at least as much, however, which will prevent order backlogs from growing. Plant managers also anticipate some further trimming of employment and hours.
Retail
Third District retailers generally met sales goals for the Christmas
shopping period, which was characterized by early and widespread
discounting. Year-to-year sales gains for the season as a whole
ranged up to 5 percent, in real terms, for area stores. Most
department stores in the region indicated they achieved the modest
sales improvement they had expected, but among discount and
specialty stores results were mixed. In particular, sales at
clothing stores in the last half of December did not appear to be
consistent with the stronger performance in earlier fall months,
after taking seasonal factors into account.
Merchants contacted in early January said sales were running about even with or slightly above the year-ago pace. For the rest of the winter, most retailers expect sales to just match last year's, in real terms. None of the store executives surveyed expressed strong optimism for the coming spring season. Several mentioned concern in the industry that major national retailers who are facing cash-flow difficulties might step up price discounting. After heavy discounting this Christmas, retailers are looking to reestablish stable pricing policies before the spring selling season begins.
Finance
Total loan volume at major Third District banks in late December was
approximately 15 percent above the same period in the prior year,
although growth appeared to ease during the month. Bankers contacted
in early January said a slowdown in the rate of growth was
continuing. Most expect overall loan demand to move up only modestly
as the national economy enters at least one or two quarters of
slower growth.
As the new year began, commercial and industrial lending was being scaled back at several large banks in the district as conditions in some sectors prompted credit reviews of companies in those industries. Builders and retailers, in particular, were being reviewed and some reductions in loan commitments were being made. Many bankers in the district expect the cutback in construction financing to result in lower total real-estate-based lending. However, some foresee a pickup in residential real estate financing, in response to recent and anticipated reductions in mortgage rates, which would mitigate the extent of the decline.
Consumer lending has been growing at a steady pace since last summer, but bankers generally expect growth to diminish, at least through the first half of the year. They cite the decline in auto sales as a negative influence on consumer borrowings, and several note that, while credit-card sales are growing steadily, paydowns are on a rising trend, leaving net outstandings nearly flat.