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Beige Book Report: Philadelphia

March 9, 1994

Economic activity in the Third District was adversely affected by weather in February, as it was in late January, but business contacts generally retained positive opinions about underlying conditions. Despite interrupted production schedules, industrial firms reported an increase in shipments. Retailers, however, suffered significantly; many merchants and auto dealers indicated that sales for January were off as much as 20 percent from the prior year, and that results in February were not much better. Bankers generally reported declines in outstanding loan volumes for both business and consumer lending, although several said this was largely seasonal. Realtors indicated that the demand for homes seems to be on the rise, although recent bad weather had seriously hampered sales. The weather also delayed construction, but the recent trend was reported to be rising somewhat for homes but flat for most types of commercial buildings.

Looking ahead, most of the contacts surveyed for this report have positive views. Manufacturers predict further gains in shipments and orders in the next six months. Retailers and auto dealers believe sales will resume an upward trend as spring approaches. Bankers look for a pickup in consumer lending and modest gains In business lending. Realtors are optimistic that home sales will continue to increase. They look for further growth in demand for industrial space but very little improvement, overall, in office markets.

Manufacturing
Third District manufacturers reported in February that activity continued to move up, on balance. Half of those surveyed said business was steady, while nearly four-in-ten said business was increasing. Positive reports predominated in most of the major industrial sectors in the region, with the exceptions of food processing and apparel. More firms in those sectors reported declines in orders or shipments than reported increases.

Winter storms in January and February affected many of the region's manufacturing firms. The inability of employees to get to work on several days restricted production. Also, although shipments by area firms rose, many reported transportation delays that prevented some shipments of their products and their ability to receive some inputs. Consequently, many firms were unable to meet production goals and they had unplanned buildups of finished goods inventories.

In general, manufacturers of durable goods expect to make up the lost production. Conversely, some makers of consumer nondurables think that sales lost at retail outlets during the period of bad weather will not be recouped. Looking further ahead, around half of the manufacturers contacted for this report forecast increases in orders and shipments over the next six months while only one-in-ten anticipate decreases. On balance, area industrial firms expect the increase in shipments to reduce inventories. Their employment plans, however, call for keeping work forces at current levels.

Retail
Most of the Third District retailers contacted in late February said sales for the months of January and February were adversely affected by winter storms and persistent difficult driving conditions that forced store closings and hampered shoppers getting to stores when they were open. Many merchants estimated that their sales for January were off as much as 20 percent from the sane month a year ago and that sales were down in February also. Auto dealers reported similar results. As a result of the falloff in sales, store executives said inventories were above desired levels, although most merchants said the overstocking was not extreme.

Third District merchants are generally optimistic that sales will pick up for all lines of merchandise as spring approaches. Several said they believe a trend to higher levels of purchasing by consumers is underway and that retail sales will move up when extreme winter weather abates. Auto dealers also believe the basic sales trend is upward.

Finance
Third District bankers reported in February that loan volumes outstanding had declined from the beginning of the year, which they attributed mainly to seasonal factors. Both outstanding commercial and consumer loan volumes were declining in February as payoffs exceeded new lending. Residential real estate lending was somewhat more stable as purchase mortgages were rising while refinancings were falling.

Several bankers noted that new business lending was poised to rise as the number of loan agreements being written by their banks was picking up, but they believe the increase in outstanding commercial and industrial loan volume will be modest. Some bankers also expect consumer lending to rise as the post-Christmas payoff period comes to an end and consumer spending picks up again. They pointed to recent increases in auto financing as an indication of this trend.

Real Estate and Construction
Third District realtors reported that homes sales in January and February were off substantially from the same months a year ago, due to heavy snowfalls and icy road conditions that hampered sales efforts. Otherwise, realtors generally said the sales trend has been strong since the fall, and that inquiries from prospective buyers continued without interruption during the periods of bad weather. Several realtors noted that there is a growing demand for homes in the higher price ranges and that "move-up" buyers are joining first- time home buyers in boosting overall demand. Nonetheless, realtors also indicated that the inventory of homes for sale, while down from last year, is still relatively high. end they expect this situation to restrain increases in home prices during most of 1994.

Realtors active in office markets indicated that demand for space was flat in central Philadelphia but up slightly in most suburban areas. According to surveys by area realtors, the office vacancy rate in central Philadelphia has been steady at approximately 16 percent while vacancy rates in the suburbs have been edging down and ranged from 13 to 25 percent as 1994 began. Effective rental rates have been easing in Philadelphia but are nearly steady in the suburbs. Realtors said many companies in central Philadelphia have under-used space as a result of past downsizing and will not be in the market for more space soon. In the suburbs, realtors said, there could be an increase in demand for space by year-end.

Construction activity of all kinds was interrupted by the weather throughout the Third District in January and February. The trend in commercial construction remains weak, but some homebuilders have seen recent increases in contracts for new homes. Commercial realtors note that the growing demand for industrial space could lead to some new construction and renovation work toward the end of the year, and they say that demand for office space in some suburban markets might result in the beginning of some new buildings later in the year as well.