January 22, 1997 Federal Reserve Districts Third District - Philadelphia

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Reports from Third District business contacts in early January suggest that economic activity in the region has been moving up slowly. Manufacturers said orders were increasing and they have stepped up shipments. Most retailers indicated that they met their planned sales levels for the Christmas period--around 5 percent above 1995--but electronics and computer stores failed to match either their expectations or their year-ago results. Auto dealers said sales dropped seasonally in December but they expect a rebound soon. In general, both manufacturers and retailers indicated that inventories were around planned levels. Bankers reported a seasonal increase in credit card lending but said other types of lending have been flat. Businesses in several areas of the Third District noted continued hiring, especially in some service industries. However, manufacturers have generally not been seeking to increase employment, although they continue to say they need skilled workers in some specialized occupations. According to reports from some major employers in the District, there does not appear to be an acceleration in the rate of general wage increases. Manufacturing Manufacturing activity picked up in early January after a slow December, according to reports received from Third District industrial plants. New orders were moving up, and shipments were increasing slightly while order backlogs were falling. Inventories increased slightly. Producers of durable goods reported slightly stronger demand for their products than did producers of nondurable goods. Area manufacturing firms are expecting some improvement in the first half of the year despite the current slow start. On balance, they predict rising orders and shipments over the winter and spring, but they are not planning to build up inventories in anticipation of the increased demand for their products. Industrial prices have shown virtually no change; manufacturers said both input costs and output prices have been mainly flat in recent weeks. Although a few manufacturers said they expect some price increases will be announced by their suppliers early in the year, they are not certain these higher prices will be effectively implemented. Retail Most Third District retailers contacted in early January said their sales for the Christmas shopping period met planned levels, which called for a year-over-year increase of around 5 percent, in current dollars. Several department stores reported that their gains were even greater, but some stores concentrating in electronics and personal computers failed to meet expectations, and some of them saw sales decline from the levels of Christmas 1995. Unplanned discounting appeared to be minimal in the final days before Christmas as well as in the week after. Several stores noted that they ran out of popular items before Christmas and were unable to replenish stocks. Most retailers said their inventories were at desired levels as the new year began, and some described them as below normal. Auto dealers in the region said sales dipped seasonally in December but they expect a rebound soon. Inventories varied among dealers but appeared to be around planned levels overall. In general, dealers expect sales in 1997 to be about even with the 1996 total, and they expect sales of light trucks and sport-utility vehicles to continue to be relatively stronger than sales of sedans. Although some manufacturers' rebate programs have been extended into the new year and some reduced finance rates have been offered recently, dealers do not anticipate an extensive increase in these promotional strategies. Finance Bank lending picked up seasonally for consumer loans, mainly credit cards, in mid-December, according to Third District bankers, but other credit categories have been flat. Most bankers continued to say competition for new business loans was strong and there was currently little net growth in business loan volume among major banks in the region. While some bankers and other business contacts said many firms were planning increased capital spending in 1997, bankers said they have not seen any indications that this will result in significantly stepped-up borrowing by either current or new customers. Labor Demand Increased employment has been evident in some areas of the Third District recently. Businesses in central Pennsylvania and Delaware indicated that they have added workers and are looking for more. Most of the job gains have been in service industries. Manufacturing employment continued to drift down in most of the District, but demand for skilled manufacturing workers, such as machinists and tool makers, is reported to exceed the supply of available workers in many areas. The occupational categories for which there has been relatively strong demand are administrative and data processing workers and truck drivers. Despite the signs of increased labor demand, most of the employers reporting on their latest companywide pay increases are raising wages less than 4 percent, around the same as recent annual increases. Return to top New York Cleveland