June 13, 2001 Federal Reserve Districts Third District - Philadelphia

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Overall business conditions in the Third District continued to be soft in May. Manufacturers reported further declines in orders and working hours. General merchandise sales were flat compared with April and with May of last year. Auto sales in May were below the same month last year. Bank loan volumes rose moderately during the month. Residential real estate sales slipped, and commercial leasing activity continued to decline. Businesses contacted for this report generally expect growth to resume sometime during the second half of the year, albeit at a slow pace. Manufacturers expect an increase in orders within the next six months, but they do not plan to extend working hours. Retailers anticipate a slow summer followed by a slight pickup in sales in the fall. Bankers anticipate slight gains in business and consumer lending, but they expect the demand for real estate loans to ease. Manufacturing Third District manufacturing activity continued to decline in May. Although shipments were about steady, the region's manufacturers saw a drop in new orders. The falloff in orders was slight for most firms, but relatively large declines in demand were noted by several producers of transportation equipment, industrial machinery, and industrial materials. Firms that supply the telecommunications industry with a variety of products generally reported weak demand from that sector. Overall, manufacturers trimmed working hours and reduced employment. Although capital spending plans at area plants call for stepped-up outlays in the second half of the year, on balance the increase will be slight. Manufacturers indicated that, except for fuels and electricity, prices were steady in May. Firms contacted during the month indicated that slow demand and foreign competition were keeping most input and output prices in check. But rising fuel prices were cited by many firms as a deterrent to expanded sales, especially of motor vehicles and construction equipment. Manufacturers expect business conditions to improve during the next six months. Firms in nearly all of the major manufacturing sectors in the region forecast higher demand for their products in the second half of the year. The exceptions are apparel producers, who anticipate a drop in orders, and producers of chemicals, transportation equipment, and industrial materials, who expect steady order rates. Despite the forecasted increase in business, area manufacturers project no rise in order backlogs, and they do not plan to extend working hours during the next six months. Retail Retail sales in the Third District were virtually flat during May. Sales were also level compared with last year. Although sales rose slightly at some discount stores, sales at other types of stores were off. Merchants indicated that a period of cool, wet weather hampered sales of summer clothes and other seasonal merchandise. Sales of big-ticket items have been slow as well. Retailers generally reported continuing low levels of store traffic and spending per shopper. Many stores have stepped up discounting to boost sales. Store executives generally anticipate a slow summer. Most of those contacted for this report expect a slight pickup in the fall, and they have planned their purchasing accordingly. However, several store executives said they are prepared to cut or cancel orders if sales do not turn up. Auto dealers indicated that sales ran at a nearly steady pace during May but below the rate posted in May of last year. Manufacturers' incentives remain extensive, and dealers said that rebates and low-cost financing were necessary to keep sales from slipping further. Finance Total loan volume outstanding at Third District banks rose moderately in May. Bank lending officers said most of the growth has been in credit card loans and residential mortgages. Other types of consumer lending, such as auto loans and home improvement loans, have declined. Mortgage refinancing activity has been strong, but most of the bankers contacted for this report said demand for refinancing has begun to ease. Growth in commercial and industrial lending has been slight, although some bankers noted a recent pickup in business loan demand, mainly from existing customers. Bankers in the Third District expect overall loan volumes to increase slightly during the second half of the year. They anticipate slow growth in business lending and modest gains in consumer loans, but a decline in residential mortgage activity. Some bankers expressed concern that credit quality could slip during the rest of the year if overall economic conditions do not improve, but they do not anticipate a significant deterioration in either business or consumer loan portfolios. Real Estate and Construction There has been some softening in Third District commercial real estate markets in the past two months. The vacancy rate for office buildings has been steady in the Philadelphia central business district, but the vacancy rate has moved up in some suburban markets. An increasing amount of space in these markets has been offered for sublease by Internet-related firms. Average quoted rental rates in the region have been steady, but landlord allowances have increased, reducing effective rental costs. However, this decrease in rents is being partially offset by some landlords who are charging new tenants for electricity instead of including this expense in rental charges. Demand for industrial space has eased somewhat, but rental rates have been steady. Commercial construction activity has been decreasing, and sales and leasing activity have eased. Contacts in the region's commercial real estate sector expect markets to remain slow for the rest of the year. Residential real estate agents generally indicated that sales of existing homes have slowed recently. Homebuilders reported that sales declined during May. For both existing and new homes, the slowdown has been sharper in the higher price ranges. House prices have been close to steady for both new and existing homes. Real estate agents and builders indicated that the inventory of homes for sale has been running close to or a little below demand. Due to the relatively tight inventory, homes have been selling quickly and at asking prices. Return to top New York Cleveland