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Beige Book Report: Philadelphia

March 10, 1993

Economic activity in the Third District was growing slightly in February, according to reports from business contacts in the region. Manufacturers continued to post gains in shipments and orders. Retailers generally said sales were running even with or above the year-ago pace. Bankers noted recent increases in commercial and industrial lending, and rising mortgage loan volumes as February drew to a close. Consumer lending was generally flat, due to seasonal factors according to bankers. Realtors reported increasing demand for industrial space while demand for office space remained weak. Home sales eased in January and February following an increase in the fourth quarter of 1992, but realtors said the slowdown may be largely seasonal.

The outlook remains positive in the Third District business community. Manufacturers forecast continued improvement and indicate they may step up hiring somewhat and increase capital spending. Retailers expect sales to improve through the first half of the year. Bankers anticipate continued gains in commercial and industrial lending and growing strength in consumer loan demand, but they expect real estate lending to ease. Realtors have a more optimistic view; they look for renewed growth in residential sales in the spring but they do not expect healthier commercial real estate markets this year. Builders expect some growth in residential and public construction by spring.

Manufacturing
Third District manufacturers reported continuing expansion, on balance, in February. About half said they were stepping up shipments and posting increases in orders while about a third said shipments and orders were running at a steady pace. Improvement was noted in all major industries in the region except textiles and transportation equipment. Firms in these industries noted some slippage in orders during February. Among all manufacturers employment and working hours were virtually steady.

Looking ahead, Third District manufacturers generally forecast continued improvement. Nearly two-thirds of those contacted for this report expect further gains in shipments and orders over the next six months, and almost one-third expect order backlogs to rise. While most plan to maintain steady employment, one-fourth intend to step up hiring. About a third of the area firms polled indicated they will increase capital spending during the next six months while only a few said they might cut back.

Retail
Most of the Third District retailers contacted in late February said sales for the month were running at or above the year-ago pace. However, some said that snowstorms during the month had held down customer traffic and sales. Merchants remarked that February is a seasonally slow month, but several said they were encouraged by the fact that sales of spring merchandise were getting off to a healthy start.

Most of the merchants interviewed expect sales to improve gradually through the first half of the year with modest gains, in real terms, for most merchandise lines. Some said they expect sales of home furnishings to pick up soon in the wake of the increase in home sales in the letter half of last year. Most store executives continued to describe the competitive situation as tight, with increasing competition in the region from discount chains.

Finance
Third District bankers gave mixed reports on lending activity, but overall, total loan volume appeared to be on a modest rise in late February. Some bankers noted a recent pickup in commercial and industrial loans booked while others described business lending as steady or down slightly. On balance, it appeared that commercial and industrial loan volume outstanding at major banks in the Third District was rising moderately as February neared a close. Most bankers said total consumer lending was about flat despite seasonal paydowns on credit card loans. Most also said that they were continuing to make net additions to residential mortgage loans outstanding but that applications were still easing. Although some noted that refinancing applications had picked up lately, they said the increase was not as great as was reported on the national level.

Looking ahead, bankers generally expect commercial and industrial lending to follow an upward trend, and they expect consumer lending to move up as well. They do not expect real estate lending to remain as strong as it has been in the past several months even if mortgage rates fell a bit farther.

Real Estate and Construction
Realtors in the Third District described commercial markets as flat but said there was some strengthening in industrial markets. Demand for office space remains low, according to realtors, but they say the decline in property values and rental rates may be near an end, especially in view of the absence of current or planned construction activity in regional office markets. Demand for industrial space appeared to be picking up, and some realtors noted recent increases in leasing and acquisitions. Reports on residential markets were mixed. Realtors said the increase in homes sales in the latter half of last year appeared to be at a pause, although sales remained strong in some parts of the region. Realtors also noted that January and February are seasonally slow months and that the inventory of homes for sale is not increasing. Consequently, most are fairly optimistic that sales will resume an upward trend in the spring.

Contacts in the construction industry generally expect activity to move up through the year. They look for gains primarily in residential and public construction. Some caution, however, that rising lumber prices are boosting construction costs, and resulting higher house prices may dampen sales, especially in the lower-priced range.