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Federal Reserve Districts

Third District - Philadelphia

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Business activity in the Third District remained at a high level in July, but growth appeared to have eased from the first half of the year. On balance, manufacturers reported gains, although fewer firms posted increases in orders than in previous months. Falling orders from Asia continued to affect the region's goods-producing sector. According to merchants, retail sales held steady at a good rate, and inventories were falling. Auto sales have remained strong except for a drop in vehicle sales for strike-bound General Motors. Bank loans in the District have been steady. Tourist activity was reported to be very good throughout the District.

Looking ahead, manufacturers anticipate a lower level of activity in the second half of the year than in the first. Retailers, however, expect sales growth to resume, and auto dealers see no evidence that car buying will ease soon. Bankers forecast that demand for credit will show little or no change in the months ahead.

Third District manufacturing activity was growing slightly in July, according to reports from the region's goods-producing firms, but gains were much less prevalent than in the first half of the year. Continuing declines in orders from Asian customers were affecting makers of industrial goods, especially producers of building materials, chemicals, and machinery. On balance, area firms reported slight increases in shipments, new orders, and order backlogs, but all of these measures showed less strength than they did earlier in the year. Inventories decreased at most of the plants surveyed, although some manufacturers of electronic parts and other intermediate goods reported unintended increases in inventories because of declining orders from their Asian customers.

Industrial prices for both inputs and products sold edged down, according to the firms surveyed. Manufacturers cited foreign and domestic competition as well as their own cost-cutting efforts as factors restraining prices.

Looking ahead, area manufacturers forecast slower activity in the second half of the year than in the first. They expect declines in shipments and orders, and they plan to pare employment. Although firms in the region plan to increase capital spending on balance in the second half of the year, fewer firms will be boosting outlays than during the first half.

Third District retailers generally reported a steady but healthy pace of sales in July. Most of the store executives contacted for this report believe the pause in month-to-month growth is mainly seasonal. They indicated that the year-to-year increase in July was good. Merchants said high consumer confidence was supporting purchases, and an increased pace of home sales was bolstering demand for home goods and appliances. Most of the retailers interviewed in July said inventories were low as they awaited shipments of fall merchandise. Merchants expect sales growth to resume with the back-to-school shopping period, although a few expressed concern that transportation problems in Asia might delay receipt of ordered goods.

Auto dealers in the region said sales continued to be strong, but General Motors dealers were suffering from a lack of supply as a result of the strike against that manufacturer. Inventories were said to be near desired levels except for GM vehicles. Manufacturers have extended their rebate programs, and dealers expect the sales rate to remain at or near the current pace.

Reports from Third District bankers indicated that loan volume in the region has been virtually steady. Commercial and industrial lending has been flat. While some banks said they were booking more loans to middle market companies, others said they were losing business borrowers who have obtained nonbank financing. Consumer lending was rising slightly in July. Some bankers noted that significant amounts of consumer debt were being consolidated into refinanced home mortgages. Reports on real estate lending were mixed. Some banks were expanding residential and commercial mortgage lending, but on balance, real estate credit outstanding at banks in the region was not growing in July. Several bankers said that commercial property prices appeared to be approaching unsupportable levels, and they were becoming more selective in considering requests for construction and acquisition financing. In general, bankers expect credit demand to remain nearly steady in the second half of the year.

Tourist activity throughout the Third District has been strong this summer. Beach resorts in New Jersey and Delaware and mountain resorts in Pennsylvania report high hotel occupancy, robust home rentals, and healthy retail activity. Additionally, real estate agents in these areas have noticed increased interest in both existing and new summer homes, and in several areas, home sales and construction have picked up. Tourist officials also reported an increase over last year in day trips to a variety of recreational locations in the region.

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Last update: August 5, 1998