November 1, 2000 Federal Reserve Districts Third District - Philadelphia

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Business activity in the Third District has eased in some sectors recently. Manufacturers report a slight drop in shipments and orders in October. Although retailers indicated that consumer confidence remains high, retail sales have risen by only a modest amount compared with last year. Auto sales have slipped but remain above last year's level. Bank lending has edged down as declines in consumer and real estate lending have outweighed a small gain in commercial and industrial loans. The outlook among the business firms contacted for this report is positive despite current signs of slower growth; the expansion in business activity is expected to be slight, however. Manufacturers as a group expect a rebound in demand, but not in all industrial sectors. Retailers forecast improvement for the fall selling season, but they anticipate only a slight year-over-year gain. Bankers anticipate a pickup in lending, but they expect growth to be slow. Tight labor market conditions prevail in the District. Firms in many industries report difficulty meeting their needs for workers, and several companies indicated that they have raised wages by greater amounts this year than in the past few years. The upward trend in input prices continues at area manufacturing plants, and the number of retailers reporting increases in wholesale prices is growing. However, both manufacturers and retailers indicate that competitive pressure is limiting their ability to pass cost increases along to their customers. Manufacturing Manufacturing activity was edging down in mid-October. Although business was predominantly steady among area firms, more companies noted declines in shipments and new orders than increases. Declining demand was especially affecting producers of textiles, apparel, lumber, and primary metals. In contrast, makers of business and industrial equipment were continuing to post gains in new orders. With the slackening pace of production, working hours have been reduced at area plants and inventory levels have risen. Looking ahead, on balance manufacturers polled in October expect business to pick up moderately during the next six months. Prospects vary considerably by sector, however. Makers of apparel and construction materials anticipate further declines in orders, but makers of textiles and metals expect demand for their products to turn up, and producers of business equipment forecast continued growth in orders. Capital spending plans at area plants remain strong, overall. Retail Retail sales in the Third District rose modestly in September and October compared with the same months a year ago. Sales of consumer electronics, appliances, and home furnishings remain on an upward trend. Apparel sales have been mixed. Cold weather has boosted sales of winter coats, and some women's clothing stores have posted strong gains with fall merchandise, but in general, apparel sales have not been rising as strongly as sales of other goods. Nonetheless, the beginning of the fall selling season has been in line with retailers' expectations, and store executives generally indicated that inventories were consistent with the sales rate. Most of the merchants surveyed in October said consumer confidence appeared to be high despite concerns about oil prices and financial market volatility. Retailers cited continuing high income in the region as a source of strength for consumer spending. But with few new products to stimulate expanded shopping, most retailers expect sales for the fall season to increase only a few percentage points from last year's results. Auto dealers also expect slow growth in sales. Auto dealers reported a slight dip in sales in October compared with September. Compared with October of last year, however, sales were up slightly. Dealers expect further slowing in the growth rate of sales, especially of sport-utility vehicles. The market for these vehicles is reaching a maximum, according to dealers. Finance Total loan volume outstanding at Third District banks has edged down in recent weeks. Although banks generally posted slight gains in business lending, consumer and mortgage lending eased. Bankers indicated that credit card loan volume had fallen slightly, although other forms of personal loans have remained level. Real estate loan volume has declined. Residential mortgage refinancing and home equity lending have slowed, and new loans have been insufficient to make up for runoffs of outstanding real estate loans. Bankers reported that credit quality for both business and personal loan portfolios has been steady. However, several banks indicated they were stepping up reviews of commercial borrowers out of concern that slowing business activity might adversely affect their profitability and debt-service capacity. Bankers contacted for this report expect loan growth to resume but to be slow for the rest of the year. They anticipate slower economic growth and increasing consolidation among business borrowers, which will limit demand for commercial credit. Even in the context of slow growth in loan demand going forward, several bankers noted that rising funding costs and lagging deposit growth might limit their ability to meet planned loan and profitability levels. Wages and Prices Firms in nearly all the major industry sectors in the District report continuing difficulty in finding enough qualified workers. Open positions remain unfilled for all skill levels from unskilled and entry-level positions to professional specialties. Even in sectors where activity is reported to be slowing, firms are unable to hire all the workers they would like. Several firms in the retail and services sectors said they have raised wages and salaries recently by greater amounts than they did in the past few years. Rising costs for fuels and other petroleum-based products are affecting nearly all firms as well as consumers in the region. In the construction, manufacturing, and retail sectors higher delivery charges are widespread. Costs for other goods are trending up, but the increases do not appear to be accelerating. However, the number of retailers reporting increases in wholesale prices has been growing. Nonetheless, recent polls of stores and manufacturers in the region indicate that increases in the prices they charge for goods are being restrained by tight competition. Return to top New York Cleveland