March 8, 2000 Federal Reserve Districts Third District - Philadelphia

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The Third District economy was expanding moderately in February, with gains in most sectors. Manufacturers reported increases in shipments and orders. Retailers indicated that sales for the month were well above the level of last February. Auto sales were steady and above the year-ago level. Bankers noted increases in lending to businesses but a slight decline in consumer and mortgage lending. Commercial real estate markets were firm, and homebuilders said sales were steady or rising. Sales of existing homes have eased. Firms in several industries have reported rising costs, primarily for basic commodities, and a recent step-up in wage increases. Looking ahead, Third District business contacts in most industries expect continued growth. Manufacturers forecast rising business activity and they are boosting capital spending. Retailers expect the spring season to yield year-over-year gains in line with recent increases. Auto dealers forecast steady sales at a high rate. Bankers anticipate growth in most loan categories, although at a slower pace than last year. Commercial real estate markets are expected to remain firm, but homebuilders and real estate agents expect rising mortgage interest rates to reduce sales of new and existing homes. Manufacturing Manufacturing activity in the Third District advanced moderately in February. Around one-half of the industrial firms surveyed during the month reported steady business, but more firms reported increases in shipments and orders than decreases. Gains were relatively more prevalent among producers of metal products, machinery, and industrial equipment. Some chemical companies reported increased sales as well. Manufacturers in the region continue to report difficulty recruiting and retaining workers, both skilled and unskilled. Some firms said they have had to limit production schedules as a result of labor shortages. The outlook among manufacturers is for continued growth. Around half of the firms polled in February forecast increases in shipments and orders during the next six months, and around one-third expect business to be steady. On balance, the region's manufacturers are planning to increase capital spending. Firms indicated that expansion is required to produce for current orders and for expected increases in orders for their products. Retail Third District retailers reported sales in February well above the level in February last year, despite snowstorms that impeded shopping on several days. Substantial gains were posted among all types of stores--discount, specialty, and department stores. Cold weather for most of the month boosted sales of winter outerwear, helping clothing and department stores to reduce stocks of these items without price markdowns. Overall, inventories were described as appropriate for the current rate of sales. Merchants generally expect sales to continue moving up. They say early indications are that spring merchandise, especially clothing, will be popular with consumers. Auto dealers generally reported a steady rate of sales in recent weeks. There has been a slowing in sales of the larger sport utility vehicles, according to some dealers, who attribute the relative softness to rising gasoline prices and less-than-expected consumer acceptance of the new larger vehicles. Inventories appear to have risen a bit above dealers' planned levels, but dealers expect broader manufacturers' incentives to underpin a high sales rate in the months ahead. Finance Bankers in the Third District generally described loan growth as slow in February. Lending to businesses was rising as commercial borrowers continued to seek loans for working capital and expansion. Commercial real estate lending was also moving up. Nonbank financial institutions such as pension funds and private investors were said to be active in commercial real estate markets. Consumer lending was off slightly, on balance, at banks in the District. Mortgage activity appeared to be easing overall, although some bankers said residential mortgage applications had picked up as borrowers sought to lock in rates. Looking ahead, most of the bankers contacted for this report expect loan growth to continue, but at a moderating rate. Several bankers said they were implementing more cautious credit terms for commercial lending, which could restrain growth in their loan portfolios. Also, bankers forecast a more modest pace of economic expansion in the region this year compared with last that will lead to a slower rate of growth in demand for commercial credit. Consumer lending is expected to pick up, but residential real estate lending is expected to decline. Real Estate and Construction Contacts in commercial real estate markets described conditions as firm at year-end 1999. Vacancy rates in important office markets in the region averaged around 11 percent, up 1 percentage point from the third quarter of 1999, mainly because new buildings have become available for lease. Average rental rates rose slightly from the third quarter, according to commercial property managers, while rates for large blocks of space in new buildings increased by a more substantial amount. The pace of nonresidential construction has slowed since the first half of 1999, but contractors and real estate developers expect little further slippage this year. They expect continued work on highways, airports, and public buildings throughout the region in addition to build-to-suit construction of offices, high-tech industrial buildings, and stores in some parts of the District. Vacancy rates are expected to inch up in some areas as new buildings are added to the available inventory, but rental rates are forecast to remain stable or rise in major markets. Homebuilders in the region reported steady or increasing sales in late January and early February. Builders said sales were somewhat stronger for homes in the lower and middle price ranges than in the higher price range. New home prices have been moving up as labor costs have increased. Sales of existing homes have slowed, according to residential real estate agents. They believe a decline in the number of homes being listed for sale is slowing the sales pace while demand for homes seems to be holding up. Real estate contacts reported that sales of second homes in prime vacation areas have been strong, although price appreciation has been moderate. Both homebuilders and real estate agents said the pace of sales will be slowed by recent increases in mortgage interest rates, although there has been an increase in home buying recently, prompted by purchasers' locking in rates before anticipated further increases. Wages and Prices Reports of accelerating wage and salary increases have been received from a range of industries, notably manufacturing, services, and trade. On average, firms have implemented recent across-the-board increases around 1 percentage point higher than in prior labor contracts. Several companies indicated that wage acceleration for unskilled and entry-level workers has become more prevalent recently than it was last year. Also, this year more firms report raising wages and salaries to retain current employees than reported taking such steps last year. Prices of industrial commodities have been rising. Petroleum products, basic metals, and building products were becoming more costly, according to manufacturers in the region. Companies in the manufacturing and trade sectors reported that rising prices for motor fuels and other petroleum products were beginning to have an impact on their profit margins. The cost of manufactured inputs appeared to be relatively steady. Some business managers said level prices for imported manufactured goods were helping to restrain increases in overall supply costs. Return to top New York Cleveland