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Federal Reserve Districts

Third District - Philadelphia

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Third District business activity continued on an upward path in October. Manufacturers had increases in shipments and orders, and they reported stepped-up demand from Asian customers. Retail sales continued to grow at a solid rate. Auto sales have been steady. Bankers reported modest gains in consumer and business lending, but a slowing in residential mortgage activity. Both manufacturers and retailers indicated that they are having difficulty finding workers, both skilled and unskilled, and that wages are rising. Service firms, with the exception of health services, also said they are having difficulty finding new employees. Some business contacts said that it is taking longer to fill open positions now than it did a year ago.

Looking ahead, businesses in the Third District generally have optimistic views, although they caution that their expectations could change if financial conditions become less positive. Manufacturers expect shipments and orders to continue growing at their current rate, but they are concerned that costs will rise as well. Retailers expect a good pace of sales in the fourth quarter, but they predict a consumer pullback if interest rates rise further. Bankers expect lending to continue moving up through the end of the year, but at a slower pace.

Manufacturers in the Third District reported moderate growth in October, on balance. While half of the firms contacted said shipments and new orders were steady during the month, one-third said they had increases. Gains were common among all the major industrial sectors in the region. Several manufacturers of industrial products and chemicals noted increases in orders from customers in Asia. Despite the increase in orders in October, most of the firms polled during the month reported that order backlogs were steady.

Employment at plants in the region has been virtually level. Several companies indicated that shortages of both skilled and unskilled workers have restricted their ability to respond to increased demand for their products. One firm reported that it recently established a plant overseas because of its inability to find more workers in the U.S.

Reports of rising costs for raw materials and supplies have become more common from Third District manufacturers. In particular, producers of chemical, food, and paper products indicated that prices for the raw materials they use have begun to increase. However, according to the firms contacted for this report, competition among firms is still keeping output prices in check, putting pressure on profit margins.

The outlook among manufacturers in the region is positive, although there is some concern regarding rising input prices. On balance, managers at area plants expect the current rate of growth in shipments and orders to continue over the next six months. They are seeking more workers, and they are planning to increase capital spending. Nearly half of the firms contacted anticipate increases in input costs, and half expect costs to remain near current levels. One-fourth plan to raise prices for the products they make, but over half will keep prices steady.

Retail sales in the Third District continued to move up at a good pace in October, according to merchants interviewed for this report. Several stores indicated that their recent year-over-year sales comparisons have been in excess of 10 percent, in current dollars. Fall apparel has been selling well, as have other seasonal items. Some stores noted a pickup in sales of camping and outdoor goods to customers who fear interruptions in utility services due to Y2K problems. Inventories were generally described as in line with plans, although a few merchants indicated their inventories were somewhat below desired levels. Reports of labor shortages have become common among the region's retailers, who anticipate some difficulty in fully staffing their stores for the holiday shopping period.

Auto dealers generally said sales have been running at a high, steady rate in recent weeks, although some noted slight easing. Inventories were in line with sales at most dealers, but several noted that the supply of popular models has not kept up with demand.

Looking ahead, most store executives expect a strong fourth quarter. Some expressed concern that recent increases in interest rates and volatility in financial markets could trim consumer confidence, but most area retailers said they have seen no sign of a slowdown in spending yet. Similarly, auto dealers believe sales will remain at or near the current pace as long as consumer confidence does not weaken.

Business continued to be good for the region's law firms and other business service firms. Service companies are adding workers in a variety of specialty occupations and basic clerical positions. Information technology professionals remain in high demand. However, hospitals and health services firms have laid off workers recently.

Lending officers at Third District banks generally reported modest growth in lending in October. Lending to individuals for consumer purchases has picked up recently, but home mortgage lending appeared to be slowing. Bankers said lending to businesses was moving up slowly. Lending officers noted that some of their business borrowers were not achieving the growth they had been expecting. Partly in response to this development, some banks said they were reviewing credit standards for commercial and industrial loans and planned to make them more stringent. Nonetheless, several bankers said lending for commercial real estate from a variety of financial firms was still aggressive in the region.

Looking ahead, most of the bankers contacted for this report expect consumer borrowing to pick up seasonally, but they expect some slowing in growth in other credit categories. Concern about liquidity at the turn of the year appears to be growing. Several bankers said they were receiving inquiries about expanded credit lines for December and January from current business and local government borrowers who are concerned about payment interruptions due to possible Y2K problems. Bankers also said they are concerned that depositors' demand for currency will rise significantly as the year comes to a close.

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Last update: November 3, 1999