May 2, 2001 Federal Reserve Districts Third District - Philadelphia

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Third District business conditions were mixed in April, although there were some signs that consumer spending was strengthening. Manufacturers saw further declines in orders, but shipments were steady. General merchandise sales rose slightly in mid-April after several weeks of easing. Auto sales also improved somewhat. Bank loan volumes outstanding have been rising slightly, mainly because of small gains in commercial and industrial lending. Residential real estate activity remains fairly high, but commercial leasing has eased. Service sector activity remains somewhat below the level achieved around the beginning of the year. The consensus forecast among the businesses contacted for this report is that overall economic activity will move up slowly in the months ahead. Manufacturers in general expect an increase in orders within the next six months, although not for all the industrial sectors in the region. Retailers anticipate marginal gains in sales for the rest of this year compared with last year. Bankers anticipate minor increases in business and consumer lending, but they expect some falloff in demand for real estate loans. Capital spending among area firms has been pared back, for the most part, although electric utilities are proceeding with expansion plans Manufacturing Third District manufacturers reported continued easing in new orders in April, but a steady rate of shipments. This marks a leveling off of the decline in shipments that began in January. However, order backlogs continued to fall. Most of the major manufacturing industries in the region experienced some respite from the first quarter's downward trend in shipments, but producers of chemicals and transportation equipment reported continued decreases. Manufacturers continue to face high costs for fuels and electricity. They report that their ability to raise prices for their products is limited by competition from Asian and European firms that benefit from the low value of their currencies in relation to the U.S. dollar. In addition, several firms indicated that their major customers were looking for price reductions as a condition of further purchases. Manufacturers expect business conditions to improve during the next six months. Firms in all major industrial sectors except chemicals, transportation equipment, and instruments expect increases in orders. Despite the forecasted increase in business, area manufacturers project no rise in order backlogs. The region's manufacturers intend to limit capital expenditures, on balance. Nearly half of those contacted for this report will maintain steady rates of capital spending during the next six months, and the number of firms planning increases is offset by an equal number reducing capital spending budgets. Retail Retail sales in the Third District rose slightly in mid-April after dropping in March. Merchants indicated that the onset of warmer weather boosted sales of spring apparel and other seasonal merchandise. The year-over-year gain has been slight, however, and sales of home appliances and jewelry have been weak. Although some furniture and home furnishing stores have posted gains recently, sales of big-ticket items have been relatively slow, and merchants say shoppers are being cautious in making major purchases. Most retailers also indicated that store traffic remains below normal levels. Store executives generally forecast very slight growth in sales during the rest of the year. Although most retailers described their inventories as appropriate for the current sales rate, many have reduced the level of inventories they plan to hold for the balance of the year. Some retailers have also indefinitely postponed plans to remodel stores. Auto dealers indicated that sales had picked up in recent weeks. Manufacturers' incentives remain extensive. Dealer inventories were generally in line with sales, and dealers were ordering cars from makers only as needed to keep up with current demand. Most of the dealers contacted in late April said they expect sales for the remainder of the year to be steady at a pace about 5 to 10 percent below last year's rate. Finance Total loan volume outstanding at Third District banks was rising slowly in April, according to bankers interviewed at mid-month. Most of the increase has been in commercial and industrial lending. Some bankers noted recent increases in requests for business loans to facilitate changes in ownership of middle market firms. Several banks reported that home equity lending was rising as a result of individuals consolidating other debt and borrowing against their home equity credit lines for automobile purchases and home remodeling. Mortgage refinancing activity was strong. Outstanding credit card loan volume was steady, on balance, at banks in the District. Bankers in the Third District expect overall loan volumes to increase slightly this year. They anticipate modest increases in business lending and slow growth in consumer loans. In general, they expect some easing in demand for real estate loans, both residential and commercial. However, there appears to be some increased interest in commercial real estate lending in the region by nonbank financial institutions. Real Estate and Construction For the Third District as a whole, existing home sales have been roughly steady recently and at a fairly brisk pace. Price appreciation has been steady for existing homes, although a bit below last year's rate. Several builders noted that they have been selling new homes for prices above the projected price. Permits issued for new homes increased slightly in the first two months of the year. Nonresidential construction activity remains strong, although contract awards have declined recently. While office and industrial markets remain tight in most parts of the Third District, there have been some recent increases in vacancy rates in a few areas. Commercial real estate contacts indicated that leasing activity has slowed somewhat and that some commercial developers have postponed starting dates for previously announced projects. Services and Utilities There appears to have been some slight easing in the personal and business services sectors since the beginning of the year, although law firms generally report steady business. Financial services firms have had mixed results. Activity has declined for firms primarily serving individuals, but has been mostly steady for firms serving businesses. Firms in the travel and hospitality industries report some slowing recently, although they forecast marginal growth later this year if overall economic activity strengthens. Telecommunications firms have experienced declining activity since the beginning of the year, on balance, and they have cut back their investment in new equipment and buildings. In contrast, electric utilities in the region have scheduled fairly large capital projects. Return to top New York Cleveland