Beige Book Report: Philadelphia
December 5, 1990
Economic activity in the Third District continued to ease in November, according to indications from business contacts. Although more industrial firms reported improving business in November than in earlier months this fall, overall manufacturing activity remained on a downward trend. Retail sales in October and November, including Thanksgiving weekend, were below sales in the same months of last year for most stores, and auto sales were continuing to drop. Bankers indicated that lending has been flat in recent weeks, with modest growth in mortgage lending offset by slower business and consumer lending.
While there is some optimism among manufacturers, in general the outlook in the Third District business community is dim. Slightly more manufacturing executives expect business to pick up between now and next spring than anticipate continued slowing, but manufacturing employment generally is expected to continue falling. Retailers expect sales for the holiday period to be below last year's results and they are concerned that sales will remain soft in 1991. Auto dealers expect sales to continue dropping. Bankers predict continued softness in lending, due to weakening loan demand and further lending restraint prompted by the need to bolster capital.
Manufacturing
Industrial activity in the Third District continued to decline in
November, but the severity of the downturn appeared to be
diminishing a bit. Four out of ten manufacturers contacted for this
report indicated that business was slipping, but this represented a
slight improvement since early fall, when over half reported
declining activity. Also, some firms indicated that business was
improving in November, in contrast to early fall when there were
virtually no manufacturers experiencing improvement. Nevertheless,
the region's goods-producing sector remained on the downward trend
that began a year and a half ago.
Although there was a slight upturn in the number of firms that reported growth in shipments and orders in November, overall new orders, shipments, and order backlogs continued to shrink at area plants. Employment also remained weak, as Third District manufacturers continued to cut payrolls and working hours, on balance.
Looking ahead, the number of area manufacturers with optimistic forecasts slightly exceeds the number predicting further deterioration in business conditions. On balance, managers at area plants expect modest increases in orders and shipments over the next six months. However, with significant uncertainty still surrounding the outlook, they are planning further cutbacks in employment.
Retail
Third District retailers contacted in late November generally
indicated that sales for October and November were below the level
for the same period last year and continued to be sluggish over the
Thanksgiving weekend. While a few upscale specialty stores were
doing well, most stores of all types were experiencing weaker sales
than they had anticipated. Retailers indicated that inventories were
at appropriate levels; nevertheless, many expressed determination to
move out all merchandise ordered for the Christmas shopping season
by the end of the year.
Store executives' forecasts of final results for the holiday sales period reflect the recent slow sales pace. Most merchants expect Christmas sales this year to be below last year's, with forecasted declines ranging up to 10 percent, in dollar terms. Retailers also generally expect slow sales in 1991.
Third District auto dealers reported a continuing decline in unit sales, and they were paring orders to manufacturers and keeping inventories lean. Most expect the downtrend to continue regardless of the course of the overall economy, and they do no expect more than slight temporary upticks in sales in response to current or future rebates or other marketing efforts.
Finance
Aggregate loan volume outstanding at major Third District banks in
early November was approximately 9 percent above the year-ago level
but flat compared to the prior month. Commercial and industrial loan
volume was below the year-ago level, continuing on the downward
trend that began during the summer; bankers surveyed in late
November said the continued softening in commercial and industrial
lending was partly due to easing demand and partly to continuing
lending restraint by banks. Consumer lending in November was well
above a year ago, but bankers said growth was slowing noticeably,
and they attributed this to increasing caution among consumers in
light of economic uncertainties and growing debt burdens. Real
estate lending was still growing modestly, mostly due to residential
mortgages; bankers described commercial real estate lending as
"inactive."
The outlook among Third District bankers is for a continued pullback in lending to business, lasting into mid-1991 at least, and softness in consumer lending until economic growth picks up. They expect banks' participation in commercial real estate financing to be restrained for an indefinite period.
Several bankers expressed concern about the imposition of new minimum capital standards. Many banks expect to limit or reduce assets in anticipation of needing to meet a capital-to-assets ratio of greater than 3 percent; however, some said reducing assets through securitization is becoming less attractive. The large number of banks attempting to sell assets is resulting in lower prices and, consequently, less funds are being generated from downsizing than had been expected.