Overall business conditions in the Third District improved slightly in August, although there was evidence of slower activity in some sectors. Manufacturers reported a better rate of shipments and orders compared to July. Retailers saw a sales increase for back-to-school shopping, although the year-over-year increase was slight. Auto sales were steady. Bank loan volume has been declining. Suburban commercial real estate markets remained fairly tight, although the vacancy rate has increased in central Philadelphia. Home sales had been steady, but real estate agents noted a drop in inquiries and purchases in the last week in August.
Expectations for future conditions have become more modest and uncertain than they were earlier in the year. Manufacturers expect growth in the next six months to be slower than it has been so far this year. Retailers say the small boost from back-to-school sales may portend slower growth ahead. Bankers expect some pickup in consumer lending but do not anticipate an increase in business lending. Real estate agents believe some prospective home buyers may delay purchases until financial markets return to stability.
Manufacturing activity in the Third District improved somewhat in August compared to July. More than one-third of the firms contacted reported increases in shipments and new orders, while less than one-fourth reported decreases. On balance, order backlogs were unchanged and inventories fell. Producers of chemicals and construction materials and equipment noted further decreases in demand for their products from Asia; reports from other industrial sectors were positive. Overall, industrial companies added workers in August, and they plan to hire more in the next six months. Firms have also boosted capital spending plans.
On net, industrial prices in the District continued to move down in August. Nearly eight in ten firms surveyed reported steady prices; however, among those noting changes, more firms reported declines than increases in both input costs and the prices of their products.
Despite the improvement in August, manufacturers anticipate slightly slower growth in business during the next six months. They expect only modest gains in orders, but they foresee some firming of prices. On balance, they plan to continue adding to payrolls.
Retailers reported the usual back-to-school pickup in late August and early September, but most said the year-over-year gain was slight. Sales varied by type of merchandise. A high sales rate for appliances and home goods appeared to be continuing, according to some merchants, who noted large increases from a year ago. Sales of other merchandise did not appear to be as strong, and some retailers think growth could be slowing. In general, discount stores were posting better sales than specialty and department stores.
Auto sales in the District ran at a steady pace during August, according to dealers, but below the rate set in spring and early summer. Manufacturers' incentives have been increased recently, bolstering sales for some dealers. General Motors outlets, however, were still short of inventory, and their sales remained well below the pre-strike rate.
Bank loan officers contacted in early September generally reported that loan volumes outstanding at their banks have been declining in recent weeks. Demand for consumer credit has dropped, but bankers expect growth in this category of lending to resume later in the fall. Business lending has also eased at the banks contacted for this report. One factor cited for the decrease was relatively strong cash levels at many firms, which allowed them to meet their financing requirements with internal funds. Bankers do not foresee a significant pickup in business loan demand, and they expect competition for commercial loans to remain very keen.
Real Estate and Construction
Home builders and real estate agents said sales of both new and existing homes were level and at a good rate in July and most of August. Some noted a drop in inquiries and sales at the end of August continuing into September, especially for homes in the upper price ranges. They believe turmoil in financial markets has made prospective buyers more cautious. Conversely, several builders and agents noted that interest by first-time home buyers remained high, and they attribute this to low mortgage interest rates and strong employment in the region. Real estate agents said home price increases have been slight and buyers are reluctant to bid prices higher now because they do not expect much price appreciation in the future.
Commercial real estate markets remained strong in most parts of the District, according to recent surveys by brokers. Office vacancy rates have fallen and rents have risen in most suburban markets, but vacancies have increased in Philadelphia's central business district. The increase in rents is expected to slow during the rest of the year as speculative and build-to-suit construction catches up to the demand for more space. The vacancy rate for industrial space has been falling in the suburbs but rising in Philadelphia. Contacts in some parts of the District report that it is difficult to obtain local government approval for industrial construction, and this is limiting the supply of new space.