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Beige Book Report: Philadelphia

March 15, 1995

Reports from Third District business contacts were mixed for February but, on balance, suggest a slackening rate of growth. Manufacturers noted some gains in shipments and orders during the month although order backlogs continued to fall. Retailers generally said the February sales rate eased from January and auto dealers noted a drop in sales as well. Bankers indicated that loan demand was soft with flat business lending and declining consumer lending. Realtors said home sales were steady in February and a large number of homes remain on the market. Commercial real estate conditions continued to be soft, according to real estate contacts, but demand for industrial space was firming. Construction activity of all types remained low.

Looking ahead, manufacturers expect continued growth although the level of optimism has declined somewhat from the beginning of the year. Both general merchants and auto dealers said they expect sales to pick up in the spring. Bankers, however, expect economic growth to slacken, keeping lending activity flat or possibly inducing a decline. Residential realtors said sales could pick up in the spring, especially if mortgage interest rates come down. Commercial realtors do not foresee much better conditions in the near future except for industrial space and perhaps for office buildings in a few suburban locations in the District. Builders expect some stepped-up activity in the spring for home building and commercial construction, primarily in suburban locations.

Manufacturing
Manufacturing activity in the Third District moved up slightly in February, according to survey contacts. Just over one-fifth of the manufacturers polled said business had picked up compared to January although about two-thirds said operations at their plants were just steady. Makers of nondurable goods fared slightly better for the month than producers of durable goods. In particular, metal fabricators and producers of electrical machinery noted a falloff in demand for their products. Overall, however, about one-third of the industrial firms surveyed reported increases in orders and shipments in February while just over half said orders and shipments were steady.

Third District manufacturers added slightly to payrolls during February although the average workweek was unchanged compared to January. Manufacturers also reported steady inventories. With respect to prices, plant managers are evenly divided between those reporting steady input prices and those reporting increased costs for purchased inputs. For their own products, two-thirds are holding the line on prices although one-fifth have implemented increases.

While the outlook among Third District manufacturers is for continued growth, the number forecasting improvement has slipped somewhat since the beginning of the year. About half of the manufacturers contacted for this report expect business to be steady during the next six months while one-third anticipate continued improvement. On balance, local industrial firms expect further gains in shipments and orders, but they anticipate that the current downward trend in order backlogs will continue also.

Retail
Most of the Third District retailers contacted for this report said sales in February eased from the January pace. A slowdown in sales of furniture and other big-ticket home furnishing items was cited by several merchants. Store executives generally indicated that the overall sales rate appeared to be steady as the month came to a close, and they were not revising their expectations that sales will pick up in the spring.

Auto dealers also noted a drop in sales in February compared to January. Some said they believe that sales were held back by recent price increases and a drop in consumer confidence. Although dealers anticipate an upturn in the spring, some said that a continuation of the lower sales rate in March would call such a forecast into question.

Finance
Third District bankers generally described loan demand as soft at the end of February. Most of those contacted for this report said commercial and industrial loan volume outstanding was flat compared to January, and that applications for new loans were falling. They also reported softening consumer lending as February came to a close, with declines in credit card balances and other unsecured consumer loans as well as auto financing. On balance, bankers making forecasts for the year expect overall economic growth to slacken and lending activity to remain flat or edge down for at least the first half of the year, and possibly longer.

Real Estate and Construction
Third District realtors described the recent rate of home sales as steady in most parts of the District although a few noted increasing sales. Home builders reported some increases in traffic at their sites but said this had not yet been reflected in increased sales. Realtors indicated that the number of homes listed for sale remains high, keeping a lid on price appreciation. Some realtors said they expect mortgage interest rates to ease by the spring and they expect this easing and the usual seasonal pattern will lead to increased sales at that time.

Demand for commercial real estate remains soft, according to commercial realtors and building agents, especially in the Philadelphia central business district. Realtors estimate the office vacancy rate at about 15 percent in Philadelphia and in the range of just under 15 percent to 20 percent in other parts of the Third District. Although this is an improvement from a year ago, some of the improvement is due to a reduction in space available for lease. Realtors said the rebalancing of demand and supply will only gradually be reflected in firming lease rates and purchase prices near the end of the year. Demand for industrial space is stronger, according to realtors, and could result in higher lease rates and purchase prices during the year.

According to contacts in the construction industry, building activity remains soft throughout the District. Expectations are that the pace will pick up somewhat in the spring, with increases in home building, construction of industrial buildings, and perhaps some office buildings in suburban areas.