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Federal Reserve Districts

Third District - Philadelphia

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Economic activity in the Third District expanded in May, but there were indications that the rate of growth was easing. Manufacturers reported increases in shipments and orders. Retail sales leveled off in May after moderate increases in the previous two months. Auto sales were slightly above the year-ago level, although the sales rate slowed near the end of the month. Overall lending continued to rise at Third District banks in May, but the growth rate slipped. Commercial real estate markets remained firm, but residential markets showed some softening. Although homebuilders generally had steady sales, there were reports of a drop in demand for homes in the lower price range. Demand for existing homes also eased, but real estate agents said land and home prices have risen significantly.

The consensus in the Third District business community is for continued but slower growth in most sectors. Manufacturers forecast a slight increase in business in the second half of the year. Retailers anticipate some improvement in sales, and auto dealers expect sales to increase. Most of the bankers polled for this report forecast slower growth in lending for the balance of the year. Real estate brokers expect commercial markets to remain firm for the rest of the year, but they anticipate further slowing in demand for both new and existing homes.

Manufacturing activity in the Third District rose in May. One-third of the industrial firms contacted for this report indicated that they had increases in orders and shipments during the month, although about half said business was steady. Relatively strong demand continued to be reported for lumber, wood products, fabricated metal products, and commercial and industrial equipment. Although order backlogs at plants in the District have been steady, on balance, delivery times have lengthened slightly. Firms in a variety of the region's major manufacturing sectors indicated that labor shortages have either limited their ability to meet growing demand for their products or caused them to reduce production rates.

Third District manufacturers continued to report rising input prices but only limited ability to pass rising costs on to final product prices. Firms queried on prices generally indicated that, to date, competitive pressures still preclude large increases in the prices of their own products, although some increases were noted for lumber, primary metals, paper products, and printing. Reports of rising wages in the manufacturing sector are still common, and some firms have noted recent increases in benefits costs as well.

Area manufacturers expect only slight increases in shipments and orders in the next six months, and they anticipate a decline in order backlogs. Although their forecast is for slight growth in business, firms polled in May plan to hire more workers, on balance, in the months ahead. Surveyed firms anticipate further increases in input costs, and they intend to raise prices for the products they make.

Reports from Third District retailers suggest that sales in May were around the same level as in May of last year. Unseasonably cold weather for much of the month was cited as a negative influence on sales. However, store officials generally indicated that business picked up during the Memorial Day weekend, and they expect some improvement in sales in June.

Auto dealers in the District reported that sales of most makes and models continued to be strong. The selling rate in May was somewhat above the rate set in May of last year. Some dealers noted a slight slowing in sales toward the end of the month, which they said was mainly the result of an inadequate supply of popular vehicles. Dealers believe the production shortfall will be made up in the second half of the year, and several have revised up their forecasts for the full year's sales level.

Third District banks reported increases in loan volume outstanding in May, but several noted that growth has been easing. Commercial and industrial credit demand did not expand as rapidly in May as it did in earlier months, according to several bank credit officers, who agreed that business borrowers, in general, have scaled back their expansion plans. Some bankers also noted that business borrowers have experienced some slippage in gross revenue and profit margins recently. Consumer lending, on balance, continued on an upward trend in May at banks in the District, although several banks said growth has slowed. Residential real estate loan volumes have moved up, but applications for mortgages have dropped.

Several bankers noted slight increases in delinquencies in their consumer loan portfolios and a decline in the proportion of loan applicants, both consumer and business, that meet their credit standards. Loan pricing was still described as very competitive, although banks in the District do not appear to be relaxing the terms of loan covenants.

Looking ahead, the consensus among the bankers contacted for this report is that overall loan growth will slow during the second half of the year. While some gains in commercial real estate lending are anticipated, residential mortgage activity is expected to decline. Slight gains are forecast for consumer and business lending through the end of the year.

Real Estate and Construction
Commercial real estate markets in the region remain strong, according to brokers and property managers. The vacancy rate for the Philadelphia metropolitan area as a whole was estimated at 12 percent recently, about the same as at the end of 1999. New office buildings and conversions of industrial buildings to offices have boosted the supply of space. Leasing activity has been brisk and rents have increased by around 5 percent from year-end 1999, according to some estimates. Demand for industrial space also remains strong. Rents, especially for new logistics and technical facilities, have been on the rise and vacancy rates have fallen. Build-to-suit construction has been expanding along major transportation corridors in the region. Contacts in commercial real estate expect markets to remain firm through the end of the year, and they foresee construction continuing at around its current rate.

Homebuilders in the region generally reported steady sales in May, although some indicated that there has been a drop in sales of homes in lower price ranges, which they attributed to rising mortgage interest rates. Backlogs of homes to be built remained high, and builders said construction activity should remain near its current rate through the rest of this year and possibly into early 2001. Builders reported that labor costs continue to rise, although they do not appear to be accelerating. Price increases for building materials have moderated compared with last year. However, land prices were said to be rising strongly.

Residential real estate agents reported some declines in the number of people looking to buy existing homes in recent weeks. However, the number of homes listed for sale in most parts of the District remains low by historical standards, and sales prices have begun to rise more sharply than they did last year. Real estate agents noted that there has been an increase in the number of people looking to rent apartments. Apartment vacancy rates in the region have declined and markets were described as tight. Real estate agents said rising demand for apartments is the result of higher mortgage interest rates, which reduces the number of people who can qualify for home mortgages, and growing employment in the region, which has boosted the number of people moving into areas where jobs are available.

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Last update: June 14, 2000