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Economic activity in the Third District appeared to be improving slightly in some sectors but just holding steady in others in late May. Manufacturers reported some increases in shipments and orders, and bankers said lending was moving up slowly. Most retailers reported steady sales in recent weeks at a rate just even with last year's pace, although some large stores were posting year-over-year gains. Auto dealers said sales of both domestic and imported cars declined during the past month. Construction activity has shown little change recently, according to builders in the region. Commercial rents have moved up somewhat since the beginning of the year and vacancy rates have edged down. Residential real estate agents indicated that sales were continuing at a good pace but below the average for the first three months of the year. Builders and real estate agents said prices for both new and existing homes were mainly level.
Information obtained from Third District manufacturers in late May indicated that activity appeared to be improving. While half of the firms contacted for this report said their business was steady, around one-third said shipments and new orders were on the rise. Gains were noted in nearly all the District's major manufacturing sectors except among primary metal producers and instrument makers. Firms in these industries reported some slippage in demand for their products. On balance, order backlogs inched up for the region's manufacturers during the past month, and delivery times lengthened slightly while inventories edged down. Manufacturers also reported some increases in employment, although work forces were said to be steady at three out of four plants in the region.
There were scattered reports of rising input prices, mainly in the nondurable goods sectors, but most of the firms reporting on prices said both input costs and the prices of their own products have been steady. Manufacturers said prices are being kept in line by strong domestic and foreign competition. They also indicated that outsourcing and other rationalization efforts are continuing as firms seek to reduce operating costs at all stages of production.
Retailers in the District gave mixed reports for May. Large chain stores indicated that sales were running above year-ago levels, with fairly good gains in men's clothing and home furnishings. Independent merchants were nearly unanimous in reporting only a steady rate of sales compared to last year. Some store owners said consumers seem reluctant to increase their spending, but restaurant managers throughout the District said business has been up strongly in recent weeks. Despite the failure of sales to meet many merchants' expectations, most said their inventory levels were not excessive.
Auto dealers said sales of both domestic and imported cars have declined in the past month. Dealers believe the slowdown will be temporary and that sales for the rest of the year will move above the level of last year's second half. Although manufacturers have been increasing incentives to boost sales, dealers in the District generally said their inventories were not high.
Third District bankers said that, as of late May, loan volumes were moving up slightly, mainly because of growth in consumer lending. Bankers reported increases in both credit card and other types of consumer loans, including revolving home equity. Some, however, said credit card loan charge-offs were still on the rise. Some bankers said they were increasing lending cautiously to established, well-capitalized real estate developers, and some banks reported recent increases in loans to businesses; but, in general, bankers said there has not been much change in commercial and industrial loan demand in the past month or two.
Real Estate and Construction
Commercial real estate agents in the District said most major commercial markets were healthy. According to recent surveys, office vacancy rates have improved slightly since the beginning of the year, and rental rates have been steady to slightly up. The office vacancy rate was estimated to be 15 percent in central Philadelphia, 9 percent in the Wilmington area, and in a range of 7 to 16 percent in major suburban markets in Pennsylvania and New Jersey. Land acquisition and build-to-suit activity has been on the rise, according to commercial real estate agents, but the market has not tightened enough to prompt speculative construction. Industrial buildings continue to be in strong demand, especially in central and eastern Pennsylvania and central New Jersey. Some warehouse buildings have been started prior to full lease-up, but developers said most lending institutions will not finance construction without firm leases and significant equity participation.
Residential builders generally reported steady sales at rates equal to the year-ago pace or higher. Several noted some slowing from the sales rate set in the first quarter, but most of those contacted for this report do not expect sales to slip below last year's level. In some popular areas builders have raised prices, but for the region as a whole there does not appear to be a general increase in new home prices. Residential developers have stepped up their acquisition of land in areas where new home sales have been strong. Real estate agents said sales of existing homes have been running above last year's rate since January, but the year-over-year gain has eased in the past month. While homes appear to be staying on the market for shorter periods, a large inventory of homes for sale in most parts of the District has been limiting price appreciation.