January 17, 2001 Federal Reserve Districts Third District - Philadelphia

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There were signs of slower business activity in the Third District in December compared with November. Manufacturing production appeared to ease, although shipments remained steady. Retailers made scant gains in the Christmas shopping period compared with the previous year. Auto sales slipped in December for the second month in a row. Total bank lending increased slightly, largely because of growth in consumer lending. The consensus among the business firms contacted for this report is that economic activity will be essentially flat in the quarters ahead, although some contacts expect slow growth for their businesses. Manufacturers expect only steady conditions during the first half of the year. Retailers anticipate a slight gain in sales during the next few months but continued pressure on profit margins. Auto dealers expect sales to run at a steady pace in 2001, but to be below last year's rate. Bankers forecast little if any gains in lending through the first half of this year. Despite the current slowdown in growth and subdued prospects for the year ahead, firms in a range of industry sectors continue to report that they are having difficulty finding qualified workers at all skill levels. Manufacturing Conditions in the Third District manufacturing sector were virtually flat in December, although there were some indications that production was slipping. New orders and shipments were steady, but employment and working hours slipped. Order backlogs declined as well. There was little variation in business conditions across the range of goods-producing industries in the region. However, makers of industrial materials and equipment seemed to be facing a weaker situation. Several firms in these sectors reported that the high value of the dollar in relation to foreign currencies was hampering their exports and aiding foreign producers in competition for domestic markets. Manufacturers expect basically steady activity in the first half of the year, on balance. While some forecast gains in orders and shipments, others expect demand for their products to weaken further before rebounding. Producers of industrial and business equipment, in particular, say sales may not increase until well into the year. Despite the lackluster outlook, capital spending plans among area manufacturers remain fairly robust. Over one-third of the firms contacted for this report have scheduled higher outlays for new equipment and expanded facilities in the first half of the year, and only about one in ten have trimmed capital spending budgets. Manufacturers indicated that input costs continued to rise at the turn of the year, but reports of price increases appear to be less widespread than they were through much of 2000. Comments from firms in the region suggest that the costs of some agricultural products and basic materials have risen recently, but overall, industrial prices have been steady. Higher energy costs, however, continue to be a concern for manufacturers as well as other businesses in the region. Despite the rising cost of energy and a few other inputs, most firms have not raised prices for the products they make. Retail Retail sales in the Third District during the holiday shopping period fell below most retailers' expectations, and year-over-year gains were minimal, on balance. Sales of apparel and jewelry were particularly weak, although merchants said sales in nearly all merchandise lines were less than they had anticipated. Store officials attribute the poor performance to the absence of new products this year and a recent retrenchment in consumer confidence. Discounting was extensive, and store executives said profit margins fell. Inventories in early January were above plan for most of the retailers contacted for this report, although the extent of excess merchandise did not appear to be great. Merchants expect that most of the overhang will be reduced through clearance sales in January. The balance of opinion among the store executives surveyed in January is that sales will be steady to slightly up during the first quarter. Auto dealers reported that sales of new and used autos and light trucks fell in December. Most of the drop in new-car sales was the result of falling demand for vehicles produced by U.S. companies. Sales generally rose for imported vehicles and those made in the U.S. by foreign-based manufacturers. Overall, dealers in the region indicated that their inventories were above desired levels. Dealers believe that the fall in demand for cars and trucks can be attributed to buyers' waning interest in the models produced by domestic manufacturers as well as a recent slip in consumer confidence. Dealers in the region expect sales in 2001 to be about 5 to 10 percent below the rate set in 2000. Finance Total loan volume outstanding at Third District banks has been edging up recently. Consumer lending has risen, although bankers indicated that much of the gain has been seasonal. Real estate loan volumes have increased at many banks in the District for both residential and commercial properties. Business lending has varied. Some banks have posted modest gains in loans to businesses, but there have been nearly equal numbers of banks that have had decreases or merely steady business loans outstanding. Bankers in the Third District expect overall loan volumes to be flat or grow slowly this year. Several bankers noted that commercial loan standards and interest rates have firmed recently, and they expect fewer potential business borrowers to qualify for credit in the next quarter or two than would have last year. Some bankers also noted recent declines in profitability among their current commercial customers, which could lead to reductions in the amount of credit extended to these firms. Bankers generally expect real estate lending to ease, although they anticipate an increase in residential mortgage refinancing activity if recent declines in mortgage interest rates persist. Return to top New York Cleveland