Beige Book Report: Philadelphia
June 20, 1990
Economic conditions in the Third District in June varied among major sectors, with most marked by some signs of current or developing softness. Manufacturing activity was close to leveling off after a year-long decline although employment was still being cut. Retail sales were barely up from a year ago, in current dollars, with results hampered by slow sales of summer goods, and auto sales have declined. Bank lending was fairly healthy year-over-year, but there were indications that growth was ebbing. Real estate activity, both residential and commercial, was sluggish, and construction, especially of offices, was dropping.
The outlook in the Third District business community is subdued. Manufacturers generally foresee a modest increase in production in the second half of the year, but they do not expect to step up hiring. Retailers are being cautious in their sales forecasts for the balance of the year, and they said planning is complicated by continued uncertainty with respect to industry restructuring. Bankers expect loan growth to continue to slacken as a result of weakening loan demand and tightening of credit standards.
Manufacturing
Third District manufacturers contacted in late May and early June
gave indications that the year-long decline in activity might be
leveling off. Over half of the firms surveyed said business was
running at a steady pace, and the number of firms reporting improved
business nearly matched the number noting declines. Although the
overall picture is one of little change, reports by industry sector
vary widely. Improvement was noted among producers of chemicals,
electrical machinery, and stone, clay, and glass products. Most of
the firms experiencing slower business were producers of nondurable
goods such as apparel, food products, and paper and paper goods,
although primary metal producers indicated some weakness, also.
Overall, Third District manufacturers noted a steady rate of new orders, a marginal pickup in shipments, and a drop in order backlogs. Although most of the firms surveyed were maintaining steady employment levels and working hours, on net, they continued to make fractional cuts in personnel and hours. Industrial prices in the region were steady, with three-fourths of the companies polled holding prices of their products steady and nearly nine-out-of-ten reporting stable input costs.
Looking ahead, Third District manufacturers generally foresee improvement in the second half of the year. On balance, they expect a pickup in orders and they plan to boost shipments accordingly, without a buildup in order backlogs. Although they expect to step up the pace of production, area firms are planning to hold the line on working hours and make some further cuts in payrolls by the end of the year.
Retail
Reports from Third District retailers in June indicated that sales
in the region were generally running only marginally above the pace
set last spring, in dollar terms, but with a great deal of variation
from store to store. Auto sales were running below the year-ago
rate. Merchants said that no particular product lines were standout
successes or laggards, although there were reports that summer goods
got off to a slow start. Retail executives attributed the greater
than usual store-to-store variance to specific situations, and they
said differences in stocking levels, pricing, and product quality
accounted for the range of performance. According to merchants,
consumers are shopping carefully for the best price and quality
combination on goods for which they feel relatively urgent need, and
are not spending freely.
Third District merchants were growing more cautious in their outlook for the rest of the year. Several said they have been trimming sales forecasts since early spring and they saw no signs of a pickup for the summer or fall. Some noted that discounting appeared to be spreading even to stores that traditionally have been able to avoid recourse to price reductions to spur sales. Merchants said that with excess capacity in retailing and little evidence of resurgent economic growth, prospects for the industry will not brighten soon.
Finance
Total loan volume at major Third District banks in mid-May was
approximately 13 percent above the May 1989 level. Loan growth has
continued on a steady pace for the past three quarters, but bankers
contacted in June saw signs of a slowdown developing. Consumer
lending, although strong year-over-year, has begun to slip,
according to bankers. They reported a drop in auto loans in line
with falling auto sales, and easing growth in home equity, credit
card, and other installment outstandings. Commercial and industrial
lending was described by bankers as growing modestly, but they
expect growth to lag as loan demand eases and tighter credit
standards are implemented, especially for construction financing.
Bankers also generally reported a continuing moderation in the
growth of real estate financing, both commercial and residential.
Real Estate and Construction
Real estate markets remain soft throughout the Third District.
Realtors and mortgage lenders indicated that housing sales were
sluggish and average selling prices were declining as sales of
higher-priced homes have fallen off more than sales of lower-priced
homes. Realtors believe activity in the higher price ranges has
slackened because concern about job security has risen among typical
move-up buyers (cutbacks in the financial services and defense
industries were mentioned) while first-time home buyers are still
motivated to buy, and are able to obtain mortgages.
Commercial and residential construction continued to decline in June as office vacancies increased and credit available to developers shrunk. Suburban office and speculative housing construction were relatively weakest, while industrial construction, which is not typically speculative, and pre-sold residential building retained some health.