September 22, 1999 Federal Reserve Districts Third District - Philadelphia

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Business conditions in the Third District were improving moderately in September. Manufacturing activity was advancing. Retail sales rose for the back-to-school period, although price discounting appeared to increase. Auto dealers said sales have been steady and at a good pace. Bank lending has been growing, mainly because of increases in credit extended to small businesses, but overall loan growth has been slow. Commercial and residential real estate markets are generally strong, but some signs of easing have been observed in demand for office space and sales of existing homes. Expectations are positive but modest. Manufacturers forecast continued growth near the moderate pace set in recent months. Retailers anticipate steady or slightly growing sales. Bankers expect some gains in business and consumer lending but anticipate an easing in real estate lending. Contacts in real estate and construction have mixed views. Most forecast steady conditions, but some believe residential and commercial markets will soften, especially if interest rates move up. Manufacturing Third District manufacturers contacted in early September reported continued moderate growth. Gains in shipments and orders were noted in all the major goods-producing sectors in the region. Production capacity at area plants appeared to be adequate to meet the modest increase in demand: delivery times and employee working hours declined slightly from a month ago, and order backlogs fell. Area manufacturers generally said both input and output prices have been steady; however, there were reports of higher prices for some raw materials, especially forest products, farm products, and chemicals used in making plastic products. Several firms noted persistent labor shortages and rising wages for both skilled and unskilled workers. Looking ahead, the region's manufacturers foresee growth in shipments and orders continuing at about the current rate. On balance, they expect to step up capital spending in the next six months but keep inventories at current levels. Managers at area plants expect to boost employment somewhat, but they are not scheduling increases in working hours. Retail Retail sales in the region picked up in the second half of August and the beginning of September. In addition to good sales of the usual back-to-school merchandise, merchants reported strong sales of women's apparel. Store executives said the recent sales rate has been in line with their plans, but some noted that they had to implement unscheduled price reductions to meet their sales goals. Inventory levels were generally described as appropriate for the current and anticipated rate of sales. Most of the merchants contacted for this report expect sales during the rest of the fall to be steady or increase slightly from the same period last year. Auto dealers reported a steady rate of sales in recent weeks. Luxury sedans and light trucks have been selling well, but sales of small cars have lagged. Manufacturers' incentives remain widespread. Inventories were said to be at desired levels for most dealers, although shortages of some popular models were reported. Finance Lending officers at Third District commercial banks generally reported slow growth in loan volume outstanding during August and early September. Loans to businesses were said to be moving up at a good pace, spurred by increased lending to small and medium-size firms. In contrast, consumer loan demand was described as slack. Residential real estate lending has been healthy. Reports on commercial real estate lending were mixed. Some banks indicated that they have recently increased lending to home builders and property developers, but several banks have begun to limit real estate lending because of concerns that property values may have peaked and that property owners cannot support additional indebtedness. Bankers in the region expect business and consumer lending to grow moderately for the rest of the year. Business expansion plans and consumer confidence levels are underpinning this growth. On balance, bankers anticipate some slowing in real estate lending as more cautious lending criteria are applied. Real Estate and Construction Commercial real estate markets in the District remain tight. Recent estimates by property managers put the office vacancy rate at around 10 percent for the region as a whole, down 1 percentage point from the end of 1998. In some parts of the region, the vacancy rate is even lower. Leasing activity has been strong and rental rates have increased around 10 percent in some markets since the beginning of the year, but overall, recent construction has made more space available and helped to restrain rent increases. Demand for industrial space continues to grow, as does construction. Industrial vacancy rates have declined, but rents have been mainly unchanged except for high technology buildings, which have had significant increases in rental rates. Although most contacts in commercial property markets expect conditions to remain healthy through the rest of this year and next, there are some signs that demand for space may be peaking. Rents have leveled off in some areas where they had been rising. Several large corporations have recently negotiated sale/leaseback contracts. Commercial real estate agents say this is an indication that owners of buildings believe their values will level off or decline. Home builders in the Third District generally reported a steady rate of sales in recent weeks. For some builders, labor shortages, especially of carpenters, have resulted in construction delays. Building materials appear to be in adequate supply, but prices have been rising. Builders have been raising selling prices in an effort to maintain profit margins. Real estate agents said sales of existing homes have eased from the pace set in the summer but remain at a good level. Increases in mortgage interest rates have damped sales activity somewhat, more noticeably for homes in the lower price ranges. Some real estate agents noted a recent easing in the rate at which selling prices have been appreciating, which they also attribute to the rise in mortgage costs. These contacts said home sales will decline further if mortgage interest rates continue to climb. Return to top New York Cleveland