December 6, 2000 Federal Reserve Districts Third District - Philadelphia

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Business activity in the Third District improved marginally in November. Manufacturers posted a slight gain in shipments although orders were only steady. Retailers reported that year-over-year gains in Thanksgiving weekend sales met or exceeded their expectations. However, auto sales slipped in November compared with the previous month and a year ago. Total bank lending has increased, largely due to growth in consumer lending. The outlook among the business firms contacted for this report is positive but muted. Manufacturers expect a slight pickup in orders during the next six months. Retailers expect smaller gains in holiday sales this year than last year. The average forecast among store officials in the region is a 4 percent increase year-over-year in current dollars. Auto dealers anticipate a slight rebound in sales after the holiday period. Bankers forecast slow growth in lending in the new year. Manufacturing Area manufacturers reported generally steady activity in November. Shipments were edging up, but new orders were flat, as were order backlogs and inventories. Among the major goods-producing sectors in the District, only food processors and electrical equipment makers noted some increases in demand for their products. Several firms in the steel and metals industries cited the high value of the dollar and competition from imports as factors limiting their sales. On balance, the region's manufacturers have been reducing employment but keeping working hours steady. Manufacturers expect a slight improvement in the next six months. They forecast a small increase in orders, which they will be able to meet without expanding employment or working hours. Capital spending plans at plants in the region still call for increased outlays overall, but the number of firms scheduling higher spending has declined from previous months. Comments from manufacturers indicated that input costs continued on an upward trend in November, and reports of increases in electricity rates and natural gas prices have become more common. Despite the rising cost of energy and other inputs, most firms contacted recently said they have not raised prices for the products they make. Retail Retail sales in the Third District generally met or exceeded merchants' expectations for the Thanksgiving weekend. Stores in the region indicated that current-dollar sales for the weekend averaged around 5 percent above the same period a year ago. Gains were posted in nearly all merchandise lines, and sales of jewelry, home entertainment equipment, and winter coats were described as especially strong. Discounting was extensive at many stores, but the price reductions that were made were planned as part of an effort to prompt early shopping. Based on the Thanksgiving results, some store officials have raised their estimates of total sales for the Christmas shopping period. On balance, however, retailers in the region believe their initial forecast of a year-over-year gain in sales of approximately 4 percent is likely to be realized. Auto dealers reported a decline in sales in November compared with October as well as with November of last year. The drop appeared to be greater for domestic models than for imports. Some dealers said their inventories have become excessive, although most dealers indicated that their inventories were just slightly above plan. Dealers expect sales to be slow in December, but they anticipate a small upturn after the holidays. Finance Total loan volume outstanding at Third District banks has moved up in recent weeks. Most of the increase has been in credit card lending. Real estate lending and lending to businesses has just edged up. Bankers said growth in business lending has been slowing because of waning demand for business credit. Bankers in the Third District expect overall loan growth to remain slow for the balance of this year and well into next year. Growth in business lending is expected to ease further. Several bankers noted that they are reviewing their commercial loan pricing policies, and the review could lead to their signing fewer new loans. Some banks also reported that their business borrowers were scaling back expansion plans and prospective borrowing needs. Real estate lending could ease, as some banks indicated they intend to reduce their real estate exposure. Most bankers expect consumer lending to rise further in the weeks ahead because of seasonal factors, and some anticipate that this credit category will be the most resilient next year as long as employment and household incomes do not weaken. Real Estate and Construction Commercial real estate markets remain strong in most parts of the Third District. The vacancy rate for office buildings has been steady at around 8 percent in the Philadelphia central business district, and rental rates have edged up. In most other major office markets in the region, vacancy rates have been dropping. According to recent surveys by commercial real estate agents, suburban office vacancy rates average around 8 percent, down nearly 2 percentage points from midyear. Leasing activity has been steady in suburban office markets, and rents have been rising. Demand for retail space has been growing, but the number of companies establishing new distribution facilities in the region has declined. Contacts in commercial real estate markets expect nearly steady vacancy rates and rents next year, and they expect construction activity next year to just match or fall slightly below this year's rate. Residential real estate agents generally indicated that sales of existing homes slowed seasonally in November, but they believe sales will return to an upward trend after the holidays. House price appreciation has moderated slightly, according to realtors, but in some areas demand exceeds supply, and homes have been selling for more than the asking price. Homebuilders reported a slowing rate of sales compared with a year ago. Nevertheless, new homes have been selling quickly and prices have been rising. Builders' backlogs should support a steady rate of new home construction through the middle of next year. Demand for apartments has been rising throughout the District. Rental rates have increased and vacancy rates have fallen to very low levels. Consultants in the multi-family real estate industry expect construction of new apartments in the region to continue at a steady rate, and they expect rental rates to rise further. Return to top New York Cleveland