September 20, 2000 Federal Reserve Districts Third District - Philadelphia

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Economic activity in the Third District has been moving up slowly. Manufacturing orders and shipments have been rising modestly. Retail sales rose for the back-to-school shopping period, although results were somewhat below retailers' expectations. Auto sales have edged down. Bank lending to businesses and consumers increased modestly, but residential mortgage lending declined. Real estate markets remain tight, and home prices and commercial rents have been rising. Although actual building activity remains fairly steady, construction contracting has eased. The consensus in the Third District business community is that business activity will continue to move up. Manufacturers expect growth to increase slightly. Retailers look for somewhat better growth in sales this fall. Auto dealers expect the current downtrend in sales to level off at a pace somewhat below the rate set in 1999 and the first half of this year. Bankers expect continuing modest growth in lending to businesses and consumers, and they expect residential mortgage lending to remain steady. Although some growth in commercial and residential construction is anticipated in parts of the region, overall building activity is expected to be nearly level through the rest of the year. Manufacturing Manufacturers in the Third District were posting gains in orders and shipments, on balance, in early September. Increases were not widespread, however. Business was rising for producers of industrial machinery, metal products, transportation equipment, and paper products. For other major manufacturing sectors in the region, sales and production were steady. Order backlogs at area plants have slipped. Around a quarter of the manufacturers contacted for this report said costs continued to rise for the products they purchase. Although nearly all firms surveyed indicated they were not raising prices for their own products, some food processing companies and producers of primary metals were charging more for the goods they make. Manufacturers forecast somewhat better business conditions. On balance, they expect slightly more rapid growth in orders in the months ahead compared with recent months. However, some producers of transportation equipment noted that demand was slowing for trucks and autos, and they expect further declines. Overall, capital spending plans for plants in the region include substantial increases. Retail General merchandise sales in the region got a boost during the back-to-school shopping period in August and September, but several retailers indicated that year-to-year gains were somewhat below their expectations. In particular, growth in sales of apparel was weaker than planned. Conversely, sales of jewelry, televisions, and consumer electronics rose strongly. Sales of personal computers rose solidly, especially in Pennsylvania where the state sales tax was waived for these goods during the first week of August. Despite slower than anticipated growth in sales, most of the store executives contacted for this report indicated that their inventories were not significantly above desired levels. Looking ahead, merchants are cautiously optimistic. Sales of hard goods remain strong, and retailers believe consumer confidence is still high. Store executives think that if apparel to be introduced later in the fall proves popular, overall growth in retail sales should accelerate. Several large national chains plan to open new stores in growing suburban areas throughout the District, and this could provide the impetus for further gains. Auto dealers generally indicated that the pace of sales has been easing, although some noted that luxury models have been selling well. Dealers believe sales will settle to a steady rate for the balance of the year but remain below the relatively high pace set last year and earlier this year. Finance Third District bankers surveyed in September generally reported that loan volume outstanding at their institutions was growing slowly. Commercial lending has been moving up at a fairly steady pace in the past few months, although more slowly than in the first half of the year. Consumer lending has also been on the rise, but some banks said growth has slowed since June. Commercial real estate lending increased slightly in August and early September. Some banks also reported increases in residential mortgage lending, but on balance, residential mortgage credit at area banks appeared to be declining. Third District bankers continue to describe loan margins as tight. Some banks said they will consider implementing more restrictive credit standards in the fourth quarter, especially for commercial real estate loans, if the region's business conditions show any signs of weakening. In general, however, bankers expect the current pace of economic activity to persist through the end of the year, and they do not anticipate significant changes in credit conditions. Real Estate and Construction Commercial real estate markets in the region remain tight. According to recent surveys by brokers, office vacancy rates in the Philadelphia and Wilmington metropolitan areas have declined by about one percentage point since spring, to approximately 9 percent and 5 percent, respectively. Rental rates have risen around 10 percent since the beginning of the year, and brokers expect a similar increase in the next six months. In addition to higher rents, building owners have been requiring longer lease periods from new occupants. Demand for space has been strong among financial services firms, pharmaceutical companies, and computer services firms. Some firms have contracted to lease more space than they currently need in anticipation of rapid growth. Demand for industrial space, primarily distribution facilities, continues to grow. Ongoing expansion of interstate and local highways in the District has attracted national firms to locate manufacturing plants and warehouses along major transportation corridors. In addition, Pennsylvania has designated tax-free zones to encourage business development, and firms from outside the region have been locating new plants in these locations. Despite the strength of commercial real estate markets, new construction has been slower recently than in the first half of the year, although a pickup in office and industrial construction has been observed in some areas where vacancy rates have fallen to very low levels. Residential real estate activity has eased, according to brokers and builders. Existing home sales have recently been running below the year-ago rate in most parts of the District, and new home sales have slipped from the pace set in the first quarter of this year. However, some brokers and builders reported increased sales in areas where job growth has been strong and in newly developing suburban areas. Despite the falloff in sales, some brokers indicated that price appreciation for existing homes has accelerated. Builders generally noted continuing steady price increases for new homes. Both builders and brokers anticipate a level pace of sales through the end of the year unless mortgage interest rates increase. Return to top New York Cleveland