October 23, 2002 Federal Reserve Districts Third District - Philadelphia

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Business conditions in the Third District were mixed in October. Activity declined in some sectors but improved slightly in others. Manufacturers reported some slowing in orders and shipments. Retail sales of general merchandise have ebbed. Auto sales have slowed also. Bank loan volumes increased somewhat, mainly because of growth in residential mortgages and consumer loans. In the service sector, temporary and permanent employment agencies reported a small increase in demand for sales and administrative workers. Information technology service firms have seen slight increases in demand from private sector firms and government agencies, but telecommunications firms continued to report flat or declining activity. Forecasts among Third District businesses vary. Manufacturers generally expect improvement during the next six months despite current sluggishness. Retailers see no signs that sales growth will improve for the holiday season. Auto dealers anticipate further slowing in sales this year. Bankers expect continued gains in residential mortgage and consumer lending, but they say prospects for business lending are uncertain. Employment agencies expect a relatively steady fourth quarter and a possible pickup in hiring soon after the start of next year. Manufacturing Manufacturing activity in the Third District eased somewhat in October compared with September. New orders and shipments were mixed among the firms contacted, with the largest number reporting no change from September to October and slightly more firms seeing declines than increases. Conditions varied among the region's major manufacturing sectors. Firms that manufacture products used in residential construction had strong demand for their products, as did some firms that produce transportation equipment. Firms producing materials for commercial construction reported weakening demand, as did firms in the metals and electrical machinery sectors. There has been little change in manufacturers' forecasts recently. Half of the firms surveyed in October expect increases in orders and shipments during the next six months, while fewer than one in ten anticipate decreases. Expectations for improved business are fairly widespread among the major manufacturing industries in the region. However, many firms that produce metal products reported they are facing growing foreign competition, and firms in all manufacturing industries indicated that the threat of armed conflict in the Middle East is prompting them and their customers to be more cautious in their business plans. Nevertheless, around one in five of the manufacturers contacted for this report have increased the amount of capital spending they plan to do during the next six months, and fewer than one in ten have reduced planned capital outlays. Retail Nearly all of the Third District retailers contacted for this report indicated that sales declined during late September and remained sluggish in early October. For most of the stores surveyed, year-to-year comparisons in the first half of October were flat to down in current dollars. A slow sales pace was reported across most lines of merchandise, and clothing sales at department stores and apparel stores were particularly poor. Some merchants attributed the disappointing sales performance to unseasonably mild weather, but most believe a weakening in consumer confidence is reducing store traffic and sales as well. As a result of lower than anticipated sales, store inventories were high. In general, retailers have not yet expanded price reductions to move fall goods, but some indicated that they would consider doing so if colder weather did not eventually stimulate sales of fall clothing. Retailers said the outlook for the fourth quarter was becoming dimmer. Few expect a strong holiday sales season. Merchants believe consumer confidence is being held in check by concerns about the economy and the international situation. Many store executives said diminishing prospects for stronger sales growth were prompting them to trim operating budgets and reduce capital spending plans for the balance of this year and 2003. Auto dealers in the region said sales fell during September and the decline continued into October. Although some manufacturers' incentives have been extended, dealers expect further slowing in sales this year. Finance Outstanding loan volume at Third District banks has increased modestly in recent weeks. The gain has come primarily from real estate and consumer lending. Almost all the banks contacted in mid-October reported continuing strong growth in residential mortgages, for both refinancing and purchases. Consumer lending at area banks has picked up slightly after a relatively flat period. Business loan totals have barely edged up. In general, banks in the region have not seen much deterioration in credit quality in their commercial loans, but several noted recent increases in consumer loan delinquencies. Bankers in the Third District expect overall lending to advance slowly through the rest of the year. Continuing growth in mortgage lending is providing most of the impetus, and bankers expect this to persist as long as mortgage interest rates remain low. Bankers expect slow growth in consumer lending, but they are uncertain about the course of business lending. Nondepository lending institutions continue to compete aggressively with banks for business loans, but investment companies have been experiencing declining revenues as asset totals and investment activity have fallen. Employment at investment companies has been declining, and capital spending at these firms has been postponed. Services Temporary and permanent employment agencies in the region reported a very slight increase in demand for workers in September and early October. The employment agencies indicated that hiring has picked up at firms in a variety of industries that have had recent increases in the volume of their current operations, rather than from firms adding employees to expand or initiate new lines of business. Employment agencies do not expect much increase in demand during the balance of this year, but several of those contacted for this report said they have been receiving a growing number of inquiries from firms considering stepped-up hiring next year. Some computer service firms reported a slight increase in business, especially from companies in the pharmaceutical and consumer goods manufacturing industries and from banks. Information technology companies that serve government clients also reported a pickup in business, with some of the increase coming from demand for systems projects related to homeland security measures. Contacts in the telecommunications industry have seen no rebound in a generally downward trend of business. They do not expect capital spending in the industry to turn up for several quarters, and they anticipate only a slow recovery in capital spending once it begins to increase. Return to top New York Cleveland