June 16, 1999 Federal Reserve Districts Third District - Philadelphia

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Business activity in the Third District continued to increase in May. Manufacturers in most of the region's major industrial sectors reported further gains in shipments and orders. Retailers posted higher sales in May than in April, and year-over-year increases were generally strong. Auto dealers also had improved sales in May compared to April. Bankers indicated that demand for business loans was on the increase and real estate lending remained at a high level. Consumer lending was rising, on balance, although some banks noted flat or falling personal lending. Real estate markets have been active. Home sales have been increasing, and commercial real estate leasing has been strong. Looking ahead, most of the Third District businesses contacted for this report have positive outlooks. Manufacturers forecast further increases in orders. Retailers expect sales to remain on an upward trend. Bankers expect overall lending to continue rising, led by an increase in business credit. Builders and property managers anticipate more construction and leasing activity in the second half of the year. Manufacturing Manufacturers contacted in May reported continuing gains in business, on balance. Around one-third said shipments and orders increased during the month, and less than one-fifth said these measures had fallen at their firms. Increasing activity was noted in all major industrial sectors in the region except among producers of paper products and primary metals. Steel makers reported that intensifying foreign competition was limiting domestic firms' sales and holding prices down. Overall, area manufacturers continued to indicate that prices for both the goods they buy and the products they make remain steady. The forecast for Third District manufacturing remains positive, on balance. More firms expect increases than decreases in orders and shipments over the next six months. A modest increase in order backlogs is predicted among the firms contacted for this report, but delivery times are expected to decrease a bit. Some increases in employment and working hours are planned, but roughly two-thirds of area plants will hold workers and hours steady. Retail Retail sales in the Third District increased in May from April, according to merchants contacted for this report, and several store executives noted strong year-over-year gains as a result of healthy Memorial Day sales this year. Warm weather in late May and early June was boosting sales of summer apparel and other seasonal merchandise. The combination of strong sales of summer goods and gift items for graduations and Fathers' Day was leading the sales rate higher in June as well. In general, retailers are optimistic that the strength in sales will persist into the summer. Auto dealers reported an increase in sales in May compared to April. The continuing popularity of light trucks and manufacturers' incentives on sedans were bolstering the sales rate. In general, dealers described inventories as appropriate for the current pace of sales, although some said their supplies of the most popular types of vehicles were lean. Finance Third District banks were posting gains in loans in the major credit categories in May, although some banks reported that consumer loan volume was flat or falling. To some extent this reflected a moderating of demand for personal credit, but some banks said they were intentionally reducing some types of consumer lending in order to reallocate resources to more profitable credit areas. Bankers said that loan demand was rising from small and medium businesses in a wide variety of industries that were expanding capacity, and they expect this trend to continue. Real estate loan demand, both residential and commercial, remained strong. Banks indicated that property development activity has been rising and developers have been looking for increased leverage in order to maintain their growth. Real Estate and Construction Home builders gave generally positive reports for May, indicating continuing high sales rates or increases compared to the prior month. Several builders mentioned that sales of homes in higher price ranges were rising more than lower priced homes. Some builders indicated that they had recently posted price increases of a few percent for single homes while keeping townhouse prices steady. Although some builders reported difficulties in locating supplies of some materials, primarily wallboard, none of those interviewed in early June said that their construction schedules had been delayed as a result. Sales of existing homes have also been on the increase, and real estate agents said prices have started to appreciate more rapidly than they did last year. Commercial real estate markets in the District continued to tighten, according to local developers and property managers. Leasing activity has been strong so far this year and rents have been rising. Recent estimates of vacancy rates were around 5 percent in Wilmington, 13 percent in Philadelphia, and in a range of 5 to12 percent in suburban locations. In most areas, office vacancy rates have decreased about one percentage point since the end of last year. Industrial buildings continued to be in demand in the region, and conversion of older structures to nonindustrial uses has reduced availability and prompted construction of new space. Most of the demand is for flex space and warehouses, although some new manufacturing facilities have been built recently. Contacts in the commercial property industry said sources of private financing have become more active in the region, and they expect construction, leasing, and sales to increase through the rest of the year. Prices and Wages Businesses in the Third District noted price increases for some of the goods they purchase, and some firms have recently raised prices for their own products. Overall, however, increases have been slight and infrequent. Most manufacturers said markets remain very competitive, especially for products that are imported as well as produced domestically. Retailers also said that they have seen little or no increases in prices of the goods they purchase, and they noted the damping effect of foreign supply on prices as well. The rate of wage increase in the region does not appear to have accelerated, according to businesses surveyed in recent months. However, reports of rising benefits costs have become more common. Some labor contracts that have been signed at area firms recently included wage increases averaging around 4 percent per year over the life of the contract. Return to top New York Cleveland