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Federal Reserve Districts

Third District - Philadelphia

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Business conditions in the Third District were mixed in April. Manufacturing activity edged up slightly during the month. Retail sales slipped from March, although the year-to-year comparison was positive. Auto sales also fell in April and dropped below the year-ago level as well. Bankers generally reported steady loan volumes in April; a rise in business lending offset a decline in consumer lending.

Demand for technical workers remained strong throughout the District, and employers said salaries for these jobs were rising strongly. In contrast, overall employment appeared to be growing moderately, and firms in a wide range of industries expect wage increases to average around 3 percent this year.

Business firms in the District report that prices are mainly steady, although manufacturers have noted some recent increases in the cost of inputs. Retailers have seen some scattered increases in costs but do not report a general rise in wholesale prices. Contacts at businesses of all kinds said they were continuing to give their attention to cost-containment measures in all phases of their firms' operations.

Third District manufacturing activity edged up slightly in April in nearly all of the region's major goods-producing sectors. The most notable gains were posted by makers of electronic products and electrical machinery; furniture makers and food processors said demand for their products was just even with that of the previous month. Overall, around one-third of the District's manufacturers reported rising orders and shipments, and one-half said their business was steady. Slight declines in order backlogs and delivery times at area plants as well as steady working hours indicated that demand was not pushing against capacity limits.

Looking ahead, the consensus among the District's manufacturers is that activity will continue to move up during the next two quarters. Nearly half of the firms surveyed for this report forecast increased shipments and new orders, while only one in ten anticipate decreases. On balance, firms expect to meet the rising demand without any significant increase in order backlogs, although they plan to add employees and increase working hours.

Third District retailers said the pace of sales in April eased from March but exceeded April of last year. Chain stores--department stores, discounters, and large specialty retailers--generally had better results in April than small independent stores. According to reports from merchants in the region, chain store sales in current dollars have recently been running nearly 5 percent above a year ago, while sales for small stores have been up only a few percent. Merchants suggested several factors to account for the March to April slowing: an early Easter that shifted April buying into March; recently raised interest rates and lowered credit limits on credit cards; and a lack of new products to spark consumer enthusiasm. In particular, retailers said sales of spring apparel have not met their plans. Despite the unanticipated slowdown in sales, most merchants said their inventories were lean, and some even reported stockouts of certain items.

Auto dealers throughout the District noted a slowdown in sales in April compared with March and with April of last year. Demand for domestic autos was generally reported to have dropped significantly below expectations, and light truck sales were also down, although not by as much. Sales of imports have fared relatively better, although sales of some makes were weaker than dealers had anticipated. In response to slowing sales, some domestic manufacturers have instituted or expanded rebate programs.

Loan volume at major Third District banks has been steady in April as a decline in consumer loans was offset by an increase in commercial and industrial lending. Bankers contacted for this report said demand for consumer lending has eased somewhat recently despite active marketing efforts; however, they also noted that they have been putting somewhat more restrictive credit standards in place for new credit card customers.

The increase in business lending posted in April came largely from new borrowing by existing customers, especially middle market companies, according to bank lending officers. Bankers said the borrowing has been by firms in a wide variety of industries that are purchasing new equipment and making improvements in their facilities in order to cut costs and expand their operations.

Labor Demand
Employers in the Third District generally are adding modestly to their work forces, although demand for technical workers continues to be strong. Service industry firms report they are in need of qualified computer personnel, especially programmers and software developers. Demand is particularly strong at telecommunications companies. Manufacturers are seeking machinists and workers trained in automated production processes. Educational institutions in the region are establishing training programs in cooperation with large employers or employer groups to meet the need for workers with these skills. Salaries for these jobs were rising sharply according to firms in the region, but for wages in general, most companies contacted said they anticipate the increase during 1997 will be around 3 percent.

Although most business firms contacted for this report said prices for both the goods they purchase and the products they produce or sell have been steady, there has been an increase in recent months in the number of manufacturing firms that have experienced increases in input costs. Retailers gave mixed reports on the costs of the goods they sell: apparel costs appear to be steady, but merchants have seen increases for some other products. Business contacts in all industries said they were continuing to emphasize cost-containment and cost-cutting efforts in all phases of their operations. Cost-reduction measures cited included concentrating orders with lower cost suppliers, streamlining purchasing procedures, reducing inventories, reconfiguring manufacturing processes to shorten production time, installing more efficient equipment, and establishing more integrated links in sales and production plans between supplier firms and their customers.

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Last update: May 7, 1997