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Beige Book Report: Philadelphia

June 22, 1994

Reports from businesses in the Third District suggest that economic activity in the region was increasing modestly in early June. Manufacturers indicated that orders and shipments were rising moderately. Retailers had mixed results: apparel sales were down from a year ago but sales of home furnishings were on the rise. Auto dealers generally indicated that sales were healthy. Bankers said that growth in consumer lending remained fairly strong while commercial and industrial lending was just edging up and real estate lending was dropping. Realtors generally reported that the pace of home sales remained good while demand for office space continued to be weak. Homebuilders reported that construction activity has eased recently.

The general outlook among the businesses polled is positive, although contacts have trimmed their forecasts somewhat since earlier in the year. Manufacturers anticipate continued improvement, but they do not expect demand for their products to grow as rapidly as they had forecast this past winter. Retailers remain optimistic, but they also have reduced the amount of growth they are forecasting for the balance of the year. Bankers expect commercial and industrial lending to continue moving up slowly. They expect consumer lending to expand further, but several bankers said they anticipate some slowing in the rate of growth. Realtors believe the rate of home sales will remain good unless mortgage rates begin to climb again, but builders are growing less optimistic about prospects for construction during the rest of the year.

Manufacturing
Third District manufacturers polled in early June reported that activity continued to move up at a modest pace. New orders were on the rise at about one-quarter of the firms surveyed, and about one- third were stepping up shipments. However, conditions varied across major goods-producing sectors in the region: manufacturers of machinery and transportation equipment were experiencing the largest gains while orders were either just steady or down somewhat at companies producing primary metals and metal products and at printing plants.

Most local manufacturers were holding inventories steady, although reports of decreases slightly outnumbered reports of increases. Delivery times were unchanged, on balance, as was employment. Manufacturers continued to report increases in employment costs, primarily as a result of increased costs for employee benefits, with relatively smaller increases in wage rates.

Manufacturers' expectations for the balance of the year are positive, although the level of optimism has edged down a bit since the first quarter. Just over 40 percent of manufacturers contacted for this report forecast gains in orders and shipments for the second half, while about 20 percent anticipate decreases. Based on these forecasts of demand, about half of the managers at area plants intend to hold inventories steady and one-third plan to make reductions.

Almost two-thirds of the manufacturers contacted for this report said input prices were steady, although nearly one-third said they were paying more in June than they had in May for certain raw materials, such as metals and chemicals, and for electricity and natural gas. Around 80 percent of the firms polled indicated they were holding the prices of their own products steady, but around 15 percent were raising prices. Looking ahead, around half expect both input and output prices to remain at current levels, but 40 percent expect both to increase.

Retail
Third District retailers gave mixed reports on sales for May and early June. Most of those surveyed said apparel sales were off from last year, and merchants attributed the decline to unseasonably cool weather that dampened demand for spring and summer clothes. Sales of home furnishings and building supplies were generally described as good. Several merchants noted that consumers continue to look for price discounts, making markdowns necessary to maintain sales growth. With the traditionally slower sales pace of the summer months approaching, merchants said they are being very cautious in inventory planning. Retailers' sales forecasts for the fall are conservative as well.

Auto dealers continued to report year-over-year gains in unit sales for May and early June. Some dealers said they are unable to meet demand for a few popular models, but, in general, dealers said their inventories were adequate and they had no plans to increase them. Dealers forecast that unit sales for all of 1994 will be above sales in 1993 by 5 to 10 percent as long as auto loan rates do not rise from current levels.

Finance
Most of the Third District bankers contacted for this report in early June said trends in lending had changed little from earlier this spring. Overall loan growth was moderate, with gains resulting mainly from credit card and auto lending. Commercial and industrial lending was just edging up, and real estate lending was declining. Bankers generally described loan pricing for both business and consumer lending as very competitive, and some expressed concern that margins were narrowing as loan rates lagged behind increases in funding costs, despite the recent increase in the prime rate.

Looking ahead, the bankers surveyed in June generally said they expect commercial and industrial lending to grow just slightly in the months immediately ahead. They expect further growth in consumer lending but several mentioned that the pace may slacken, partly as a result of the slower growth in consumer spending that they predict and partly as a result of less aggressive marketing of consumer loans.

Real Estate and Construction
Commercial real estate markets remain soft, according to leasing officials, with the vacancy rate somewhat higher in central Philadelphia than in suburban areas. No major office construction projects are expected to be started this year. Contacts point out that pharmaceutical companies have expansion plans, but they have put them on hold while new legislation on national health care policy is debated.

Reports from homebuilders indicated that the pace of housing construction was slipping in May and June, and some builders said they were operating below last year's rate. Conversely, realtors continued to indicate that home sales were continuing at a healthy pace, especially for low- and mid-priced homes. However, they caution that home buying will drop if mortgage rates start moving up again.