January 19, 2000 Federal Reserve Districts Third District - Philadelphia

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Business activity continued at high levels in the Third District at the turn of the year. Manufacturers posted increases in shipments in late December and early January, although the pace of new orders was reported to be only steady in recent weeks. Retailers generally recorded substantial increases in sales for the holiday shopping period. Auto sales remain brisk. Bankers noted increased consumer lending but decreased real estate lending. Commercial and industrial loans have been seasonally flat. Businesses in the Third District reported very few problems with computer systems as the century date changed. Manufacturers had built up inventories slightly in case their supplies were disrupted. They plan to reduce them to normal levels in the current quarter. According to reports from stores, there was some stockpiling of bottled water, batteries, and some food items by individuals, but the buildup appeared to have only a very minor effect on normal consumer purchasing patterns. With Y2K concerns out of the way, businesses in a wide range of manufacturing, financial, and service industries say they will step up implementation of computer systems for business applications and Internet activities this year. Work on these new projects is expected to begin near the end of the first quarter, after firms are confident that their computer systems can handle year-2000 and leap-year dates. In the Third District business community, the outlook for the new year is generally positive. Manufacturers expect orders to rise. Retailers anticipate a continuing high rate of sales. Auto dealers expect sales in 2000 to remain high but possibly slip a bit from last year's rate. Bankers forecast rising loan demand through the year, although they expect growth to ease from last year's pace. Demand for labor is not expected to slacken except in the construction sector, where a decline has already begun. Manufacturing Third District manufacturers contacted in late December and early January said that shipments were rising but new orders were just holding steady, on balance. Increases in demand were noted by firms that manufacture lumber products, plastics, primary metals, and fabricated metal products. In contrast, orders were declining at food processing plants, printing firms, and makers of electrical machinery. Firms in a variety of industrial sectors boosted inventories of inputs around the turn of the year to be prepared for possible Y2K-related supply interruptions. There were no reports of serious disruptions, and manufacturers plan to work down the additional inventories, which appeared to be minor, over the next few months. Looking ahead, manufacturers in the region expect activity to resume its upward trend. On balance, they expect orders and shipments to rise in the first half of the year, and they foresee a slight increase in order backlogs. On balance, capital spending is slated to rise at industrial plants in the region, and there are indications that implementation of data processing and Internet systems will accelerate now that Y2K concerns have passed. Reports that labor shortages have hampered manufacturers' ability to respond to growing business opportunities persist, although they are not widespread. Similarly, a number of firms in the region report that they are moving some production to foreign countries to obtain needed workers and to reduce costs. Manufacturers continue to note an upward drift of input prices, but they generally indicate that competitive pressures are limiting their ability to charge more for their own products. Nonetheless, about one-third of the firms contacted for this report said they plan to raise prices during the first half of the year. Retail Retailers in the Third District reported that sales for the holiday shopping period registered strong increases from the prior year's level. Sales rose from Thanksgiving to Christmas and were especially high in the week after Christmas. Merchants indicated that the year-over-year increase was around 6 percent, in current dollars, for stores open at least a year. Discount and club stores reported even greater increases. Electronics--especially new digital products--jewelry, and sports apparel sold well. Post-holiday inventories were generally described as being at or a bit below planned levels. Price markdowns were not widespread among stores, either before or after Christmas, although there were reports that some Internet retailers offered substantial discounts. Overall, merchants expect a good selling climate to prevail in the months immediately ahead. Auto dealers said sales picked up during the final weeks of last year. They expect the sales rate this year to match or fall just slightly below last year's rate. According to dealers, consumer confidence has not been shaken by recent volatility in the stock market, and manufacturers' incentives are overcoming the potential negative impact of higher interest rates on sales. Dealers also noted that there is a growing consensus in the industry that fundamental demand for motor vehicles has increased; the number of vehicles owned per household has risen in recent years, and industry analysts expect this greater demand to provide a floor for the annual sales rate in future years. Finance Third District bankers interviewed in early January said loan demand was consistent with the normal seasonal pattern--consumer lending has risen, but commercial and industrial loan demand has been flat. Bankers expect consumer lending to grow slowly this year, supported by high employment and rising income, but restrained by already high household debt-levels. Commercial and industrial lending is expected to pick up by the end of the first quarter. Bankers' discussions with current and prospective business borrowers indicate that capital spending, including spending for computer systems, may begin to rise in the spring. However, several bankers noted a decrease in the percentage of prospective borrowers that meet their credit standards, a trend that could limit lending growth this year. Real estate lending has eased. Bankers said the decline is partly due to a drop in demand for residential mortgages and partly due to the implementation of more stringent standards for commercial real estate loans. Contacts in commercial real estate markets believe nonbank financial firms may be less willing to increase lending also, because they are focusing greater attention on operating earnings of existing properties rather than the potential profitability of contemplated new buildings. Return to top New York Cleveland