Business activity in the Third District rose in May. Manufacturers reported increases in shipments and orders. Retail sales of general merchandise increased slightly, and consumer spending on travel and entertainment moved up. Auto sales have been steady. Bank loan volumes moved up somewhat, mainly because of slight growth in business and real estate lending. Commercial real estate markets have eased in recent months, but demand for both new and existing homes remains strong. Among service industries in the region there have been recent modest pickups in activity at stock brokerages, law firms, computer services companies, and truckers, but business at telecommunications companies remains lackluster.
The outlook among Third District businesses contacted in May is for further improvement, although growth is expected to be modest. Manufacturers forecast increases in shipments and orders during the next six months. Retailers expect slight gains in sales over the summer, and auto dealers anticipate steady sales. Bankers generally expect slow growth in overall lending. Employment agencies expect strengthening demand for workers in the fall.
Manufacturing activity in the Third District continued on a modestly upward trend in May. Although business is not moving up strongly among manufacturers in the region, orders and shipments have been rising at a fairly steady rate in most major manufacturing sectors. Companies that make products used in residential construction continue to report strong demand for both building materials and construction equipment. In contrast, firms supplying the telecommunications services industry report ongoing weakness. Area manufacturers continued to reduce inventories in May, 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 inputs and the goods they manufacture were steady in May, but the number reporting higher prices for both has increased compared with earlier this year.
The region's manufacturers forecast further improvement. Over half of the firms surveyed in May expect increases in orders and shipments during the next six months, while few anticipate decreases. An increase in demand will prompt some additional hiring and extension of working hours, but the increases will be modest, according to the manufacturers surveyed. Likewise, capital spending plans at area plants indicate that only slight increases are likely in the months ahead.
Third District retailers generally reported slight gains in sales in May compared with April. Sales were also up slightly compared with May of last year. Store executives said customer traffic has been good, but shoppers seem reluctant to increase their spending. In contrast, other areas of consumer spending appeared to be fairly robust. Contacts mentioned movie theaters, restaurants, and vacation travel as spending categories posting recent gains.
Auto dealers said sales in May were steady at a healthy pace, although down marginally from the rate set in May of last year. Sales of most makes of new cars have been relatively brisk, and sales of used cars have been strong as well.
Retailers expect sales to remain on a slight upward trend, with the usual seasonal slowing during late summer. Most of those surveyed for this report are optimistic that the fall will bring a boost to the sales rate. Auto dealers generally expect steady sales for the rest of the year.
Outstanding loan volume at Third District banks has been moving up slowly in recent weeks. Banks have increased business lending somewhat, but loan officers at some commercial banks said they have become more cautious in business lending in light of relatively weak growth in revenues among both current and prospective business borrowers. Consumer lending has been virtually flat at area banks, on the whole, although some banks have posted increased credit card lending recently. Real estate lending continued to move up, albeit slowly.
Bankers in the Third District expect overall lending to continue to grow slowly this year. They anticipate very modest growth in business and consumer lending, but they expect a slowdown in residential real estate lending.
Real Estate and Construction
Third District commercial real estate markets have eased since winter. According to recent surveys by commercial real estate firms in the region, the office vacancy rate in Philadelphia's central business district has increased about one-half percentage point since the start of the year, to around 14 percent, and rental rates have declined slightly. Vacancy rates have increased more in suburban office markets, to an average of around 16 percent, and rental rates have eased except in a few markets. Relatively large amounts of office space continue to be on the market for subleasing, and this is exerting downward pressure on rents in the region. Contacts in commercial real estate have moved out their forecast of an upturn in demand for space. Earlier forecasts called for firming in commercial markets to take hold around mid-year; now most forecasts do not envision improvement until the end of this year at the earliest.
Residential real estate agents generally reported a high rate of sales of both new and existing homes in April and May. Price appreciation has appeared to accelerate for existing homes, and builders have been raising prices for new homes. Builders and real estate agents expect demand for homes to remain strong as long as mortgage interest rates do not climb, but they expect the pace of sales to slow as fewer existing homes become available for sale and local government limitations on development impede new construction.
Temporary and permanent employment agencies in the region generally reported a modest increase in demand for workers in May. Companies that have been seeking to add staff include pharmaceuticals, stockbrokers, law firms, and hospitals. There appears to be a slight pickup in computer services, including Internet web site design, but business at telecommunications firms continues to be slow. Shipping activity has been on the rise, according to a major trucking firm serving the region.