May 3, 2000 Federal Reserve Districts Third District - Philadelphia

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Business activity in the Third District expanded moderately in March and April. Manufacturers posted increases in shipments and orders. Retail sales of general merchandise were slightly higher than during the same period last year. Auto sales were solidly above the year-ago pace. Bankers reported slight increases in loan volume outstanding compared to a year ago, with most of the gain attributable to commercial and industrial loans. Firms in a variety of industries continue to indicate that finding and retaining employees is difficult. While skilled workers are most in demand in service industries, some manufacturers and construction companies indicated they have been unable to fill their needs for both unskilled and skilled labor. Reports of rising prices have increased in both the industrial and consumer sectors. Looking ahead, most business contacts in the Third District expect an easing in growth, although retailers predict an improvement in sales. Manufacturers forecast only steady rates of shipments and orders, on balance, during the next six months. Retailers expect an upturn in sales once the spring shopping period gets under way. Auto dealers foresee a nearly steady rate of sales. Bankers anticipate slower growth in business lending as a result of greater caution on the part of lenders as well as borrowers. Bankers expect mortgage lending to decline. Manufacturing Third District manufacturers reported moderate increases in shipments and new orders in April. While only a few producers of nondurable goods posted gains, most makers of durable goods saw increased demand for their products. Rising shipments and growth in orders were relatively more common among producers of lumber products, fabricated metal products, and industrial and commercial equipment. Overall, order backlogs and delivery times at industrial plants in the District have been steady. Firms in a wide range of manufacturing industries continue to report difficulty finding and retaining both skilled and unskilled labor. Third District manufacturers have trimmed their forecasts recently. Earlier in the year they were predicting gains; currently, the balance of opinion is that orders and production will remain at about the current rate during the next two quarters. Despite their forecast of steady business conditions, area manufacturers expect prices of both the materials they purchase and the products they make to remain on an upward trend. Retail Reports from Third District retailers indicated that retail sales were up moderately in March and the first half of April compared to the same period a year ago. Discount stores, furniture and home furnishings stores, and jewelry stores posted relatively strong year-over-year increases. Clothing stores had modest gains. Results at department stores varied, but on balance, these stores had year-over-year gains of around 4 percent, in current dollars. Retailers believe the late Easter this year has shifted consumer purchasing to the end of April, and they expect better sales at the end of the month. Cold weather was also cited as a cause of lower than expected sales in early April, especially for spring apparel. Auto dealers indicated that sales have been strong in recent weeks. Nearly all the dealers surveyed for this report said sales in March and early April exceeded sales in the same period a year ago by significant amounts. Extensive manufacturers' incentives were said to be supporting the high rate of sales. Dealers indicated that these incentives, in the form of rebates and low-rate financing, were offsetting any effect that might have been expected from recent increases in consumer loan rates at financial institutions. Dealers' earlier concern about slow sales of new large sport utility vehicles has receded as sales of those vehicles have risen recently. Dealers foresee some slowing in sales during the rest of the year. They expect sales for all of this year to decline a few percent from last year's level. Finance Loan volume outstanding at Third District banks has edged up in recent weeks, mainly because of growth in business lending. On balance, banks in the District were boosting commercial and industrial lending. Bankers reported that business borrowers were implementing their expansion plans for the year, although a few bankers noted that some firms with plans to develop Internet ventures were delaying those initiatives and putting them under review. Consumer lending was generally sluggish, with most banks reporting flat to slightly declining loan volume outstanding in March and April. The sluggishness in consumer lending extended to credit cards, home equity loans, and indirect lending. Bankers also reported that home mortgage refinancing activity has dropped as mortgage interest rates have risen. In contrast, purchase money mortgage lending has been rising, on balance, at banks in the region. Commercial bank lending officers anticipate that growth in business lending might ease as both lenders and borrowers become more cautious about leverage ratios and debt service burdens. However, bankers do not see any indications at this time of a slowdown in business activity in the region. Financial institutions involved in mortgage lending expect demand for purchase mortgages to slow eventually in response to recent increases in interest rates. Some banks that lend to builders and developers indicated that shortages of construction labor and land approved for development appear to be limiting the pace of home building in the region. Wages and Prices Manufacturers reported continuing increases in prices for raw materials and some manufactured inputs. The increases included but were not limited to energy resources and petroleum-based products. Sectors in which increases in input costs have been common are lumber products, paper products, chemicals, and industrial equipment. As costs in those sectors have risen, a growing number of firms have begun to charge more for the products they make. In contrast, manufacturers of apparel and processed foods indicated that their input costs have been steady and foreign competition has impeded their ability to raise prices for the goods they produce. Retailers have also indicated that they are paying more for some goods at the wholesale level. They have generally avoided passing the full increase on to final selling prices, but the combination of increases in the costs of some goods and rising labor costs are leading a small but growing number of stores to raise prices selectively. Return to top New York Cleveland