Beige Book Report: Philadelphia
March 14, 1990
Indications from business contacts in the Third District in February were that economic activity was virtually flat, overall. The manufacturing sector continued on a downward path in February, with the orders picture even dimmer than in the past few months. Retailers reported only marginal year-over-year gains in dollar sales, while auto dealers said a healthy rate of sales early in the year was beginning to fade. Bankers noted a falloff in loan growth due to slackening demand and caution in extending commitments, especially for buyouts and real estate lending.
The consensus in the Third District business community is that current conditions are likely to persist through most of the year. Negative opinions about future business activity edge out positive views among manufacturers, prompting plans to trim employment and capital spending. Retailers do not expect consumer demand to regain vigor, and they are being cautious in ordering merchandise. Bankers foresee only a slight advance in lending, at best.
Manufacturing
Manufacturing activity in the Third District continued to decline in
February, and indications from companies contacted during the month
were that the downturn, which began last spring, was steepening.
Within a generally soft manufacturing sector, conditions in durable
goods industries are somewhat weaker than in nondurables.
Most measures of industrial activity indicated a slowing pace of business in February. While shipments were edging up slightly, the rate of gain slipped from the pace set in the previous three months, and new orders, which had held up through the fall, were declining. Delivery times reported by industrial firms continued to grow shorter, reflecting the softening order situation. Despite the drop in orders, surveyed firms generally reported they were working down inventories. And, although the overall picture was dim, employment measures have shown little change; while area firms were trimming hours somewhat, overall, payrolls were being held steady. Industrial prices in the region show some signs of stabilizing; a majority of the companies contacted noted steady prices for the goods they purchase as well as for the products they make.
Looking ahead, pessimistic opinions about business conditions over the next six months slightly outnumber positive forecasts among Third District manufacturers, although in the aggregate, managers at area plants expect both new orders and shipments to run at steady rates over the period. But the slower pace of business observed since the beginning of the new year apparently is affecting production plans as local firms indicate they expect to pare back employment and working hours and make some cuts in capital spending.
Retail
Third District retailers surveyed in late February generally
indicated that sales for the month were only marginally above the
February 1989 level in current dollar terms. While no line of goods
stood out as selling particularly well or poorly, some merchants
said that women's spring apparel was selling better than expected
for this early in the year.
Most retail contacts in the Third District expect sales for the rest of the year, in current dollars, just to inch above last year's level. Most are being very cautious in ordering merchandise. Orders by retailers are also being restrained by credit conditions, as factors financing inventories for some local stores have cut back on the amount of funds they are willing to advance.
Third District auto dealers generally posted sales in early February above the year-ago level, but sales after mid-month slipped to a level just even with the 1989 rate for the same period. Although some import dealers expect sales to continue to be healthy, most dealers, both of domestic models and of imports, expect further declines this year. Area dealers have cut back on orders to manufacturers and they consider their current inventories, at around one and one-half month's supply of cars, to be satisfactory.
Finance
Total loan volume at major Third District banks in early February
was approximately 15 percent above the year-ago level but bankers
contacted late in the month said growth has slipped from that rate.
A combination of slackening demand and tighter credit standards has
reduced growth in nearly all categories of lending. Commercial and
industrial loan volume has been virtually flat in recent weeks,
according to bankers, and commitments for leveraged buyout and
capital investment financing have dropped sharply. Most Third
District banks also have curtailed lending for real estate
acquisition, development, and construction. Consumer lending growth
has been below bankers' expectations, and bankers describe personal
loan demand as weak, except for home equity credit.
Looking ahead, bankers do not expect lending activity to pick up significantly. In the absence of more vigorous economic growth, they expect virtually flat commercial loan demand and only slight gains in consumer lending. Real estate lending will remain restricted. In line with this scenario, banks are not aggressively seeking deposits.