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The upward trend in business activity in the Third District that has been building since the beginning of the year appeared to ease in August. Manufacturers reported steady shipments and orders after several months of growth. Retail sales of general merchandise moved down from July to August, although there were scanty year-over-year gains in both months. Auto sales have been steady. Tourism activity fell in July and August after a strong June. Bank loan volumes have edged down, as gains in residential mortgages have been offset by declines in other types of loans. Commercial real estate markets continued to ease. Home sales have slipped since spring, although they continue at a fairly strong pace.
Third District businesses contacted in August have positive outlooks, although many feel that prospects for the immediate future have become more uncertain. A significant number of those surveyed for this report said business and consumer confidence has become more fragile recently. Manufacturers forecast increases in shipments and orders during the next six months, but their capital spending plans are not as strong as they were earlier this year. Retailers expect slight gains in sales this fall, but they are also looking for ways to cut costs in order to maintain profitability. Bankers generally expect overall loan demand to remain flat, unless business confidence improves and firms step up borrowing. Real estate contacts anticipate steady residential sales, but they do not foresee improvement in commercial markets until next year.
Manufacturing activity in the Third District was virtually steady in August. New orders and shipments were flat during the month for around half of the firms contacted, and the number of firms seeing declines from July offset the number posting increases. Conditions were mixed among the region's major manufacturing sectors. Firms that manufacture building materials and components continued to see strong demand for their products. Demand was also strong for industrial plastics. In contrast, primary metals producers, metal fabricating companies, and electrical equipment makers generally reported declining orders. Area manufacturers added slightly to inventories in August, on balance, although half of those contacted for this report said they were maintaining steady inventories. More than three out of four manufacturers in the region indicated that prices for both the inputs they use and the goods they manufacture were steady in May, but the number reporting higher prices for both has increased since spring.
The region's manufacturers forecast improving business conditions over the next six months, although their level of optimism has slipped somewhat since the first half of the year. Half of the firms surveyed in August expect increases in orders and shipments during the next six months, while just under one in 10 anticipate decreases. In line with their positive, but more modest, outlook, area manufacturers' capital spending plans call for increases, on balance, but the number of firms that have scheduled stepped-up expenditures has declined in recent months.
Third District retailers generally reported very slight gains, at best, in sales in August compared to a year ago, and most said sales declined from July. Although the back-to-school shopping period was well underway, many stores reported a falloff in customer traffic and sales during August. Store executives said the hotter than normal weather was damping sales of fall apparel. Slipping consumer confidence was another factor some merchants cited for lackluster sales. Some stores were implementing more aggressive discounts than they had planned in an effort to spur sales. Many stores have initiated cost cutting efforts to preserve profitability in a slow growth environment. Auto sales continued at a fairly strong pace, as manufacturers continued to offer incentives on 2002 models.
Retailers said the outlook was uncertain, but they expect some improvement, especially in apparel sales, once cooler weather takes hold. Auto sales showed no signs of weakening seriously, according to dealers, but price increases and fewer incentives on 2003 models could result in a drop in the sales rate during the fall.
Travel and Tourism
The strong start to the vacation season that began in June has faltered. Tourism activity in July and August was below last year's levels in most of the region's major summer recreation venues. Hotel occupancy has generally been off from last year throughout most of the region. Campground attendance has been good, but vacation home rentals have been mixed, with some areas matching last year's occupancy rates, but many falling below. Tourism officials in nearly all parts of the region indicated that day-trip numbers have been matching or exceeding last year's levels, but spending per trip appeared to be down. Less business at resort area restaurants, retail establishments, and amusement parks could lead to the closing of some establishments, according to tourism officials. Amid the overall decline in activity, a few areas reported increased activity compared with a year ago, and attendance at museums and some urban tourist sites has increased compared with last year. Business travel remains at low levels, adversely affecting airline traffic and hotel occupancy in the region.
Outstanding loan volume at Third District banks has been flat to down slightly in recent weeks. Almost all of the banks contacted for this report said business loan totals have edged down as payoffs continue at a steady rate and requests for new loans decline. Several bankers noted some slippage in commercial loan quality recently. Bank lending officers indicated that a growing number of firms across a wide variety of manufacturing and service industries were still experiencing falling revenues and profits. Consumer lending at area banks has been weak. Although a few banks have posted slight gains recently, most of those surveyed in August reported steady or slightly declining consumer loan volume outstanding. In contrast to business and consumer lending, most banks reported continuing strong growth in residential mortgages, for both refinancing and purchases. Strong residential markets have also been boosting bank lending to homebuilders.
Bankers in the Third District expect overall lending to remain flat in the absence of a pickup in commercial and industrial lending, which they say is unlikely until business confidence improves or firms are faced with pressing needs to increase capital spending. Bankers see no signs that mortgage demand is softening, although many express concern that the current pace of real estate activity cannot persist if overall economic growth in the region slows down.
Real Estate and Construction
Third District commercial real estate markets have continued to ease. The most recent surveys by area real estate firms indicated that vacancy rates have increased 1 to 2 percentage points since spring in most markets. The office vacancy rate in the Philadelphia central business district is estimated at around 14 percent. The vacancy rate in most suburban markets is estimated to be higher, at around 20 percent. Effective rental rates have eased as building owners have expanded capital commitments, such as building improvements and free rent periods, for tenants. Contacts in commercial real estate believe markets will improve slightly, but probably not until some time in 2003, after a number of buildings currently under construction are completed and lease up.
Residential real estate agents generally reported an easing in the rate of sales of both new and existing homes in July and August, although the number of sales in those months was still said to be relatively high by recent standards. Price appreciation remains rapid in many parts of the region. Builders and real estate agents said supply and demand for homes in the region appear to be coming into balance, however. They expect some reduction in the rate of price increases and a steady pace of sales.