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Federal Reserve Districts

Third District - Philadelphia

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Business activity in the Third District was mixed in September and early October. Manufacturers reported continuing moderate gains in orders and shipments, although they did note some slight declines in employment. Retailers have been adversely affected by abnormally warm weather that has delayed consumers' fall clothing purchases and, in the opinion of some merchants, other shopping as well. Auto dealers also noted that sales have slowed in the past several weeks. Bankers generally reported a dip in consumer lending, which they attribute partially to a slackening in consumption spending and partially to more restrictive credit standards. Commercial and industrial lending has moved up slightly, and banks and other lenders continue to promote business loans aggressively.

Reports from Third District manufacturers contacted in early October indicated that moderate growth continued in the region's goods-producing sector. Around one-third of the firms said they have been getting increased orders in recent weeks, although one-fourth said orders for their products have slipped. Producers of chemicals and machinery generally said demand for their products was good, but lumber and metal producers said orders have been declining. There was little evidence of capacity pressures in the District's manufacturing sector. On balance, order backlogs were declining at area plants and delivery times were getting shorter. Most firms reported steady rates of working hours, although some firms reduced work forces.

More than three-fourths of the firms surveyed said both input and output prices have been steady. The number of firms that have raised their prices recently was offset by an equal number that cut prices. Although manufacturers who reported recent increases in input costs outnumbered those noting decreases, in general, firms in the District have been holding the line on the prices of their own products. Plant managers say price resistance from the buyers of their products has prompted them to look for and implement more efficient production methods to offset increases in the costs of raw materials.

Retailers contacted in mid-October indicated that sales, in current dollars, were below the year-ago level in September and the first half of October. The normal fall pickup in sales has been delayed, according to store executives, because of unusually warm weather during this period. Consumers have postponed purchases of fall apparel and outerwear. In addition to clothing stores, many department stores and general merchandise stores have not met sales plans as a result of weak apparel sales. For some stores the shortfall has been significant. Some merchants believe that consumers who have put off apparel purchases have cut back on shopping trips and reduced other buying as well. Colder weather was beginning to enter the region in mid-October, and retailers expressed hope that fall shopping would pick up with the return to more seasonal temperatures. In general, merchants believe consumer confidence has not ebbed, and they have not altered their fourth-quarter sales goals.

Auto dealers said that sales slipped in September from August and had not picked up yet in October. While sales of sport utility vehicles have been good, a drop in sales of sedans has pulled down overall auto sales. Similarly, overall inventories have risen above desired levels. Dealers and manufacturers are offering larger rebates and other incentives in order to boost sales.

Total loan volumes at major banks in the Third District edged down in September. Small gains in commercial and industrial lending were offset by drops in consumer and real estate loans. The increases in lending to business have come from stepped-up marketing to smaller companies and increased usage of credit lines by existing customers, primarily for working capital to support growing business activity. In addition, there were some reports of increased international financing activity. Bankers continue to describe commercial loan pricing and other underwriting terms as very competitive among banks and nondepository lenders. In contrast, although promotion of credit cards continues to be extensive, some banks have implemented stricter terms for credit cards and other forms of unsecured lending. These include more stringent credit qualifications and lower credit limits. Bankers believe that these credit limitations and a pause in consumer spending have both been factors in the recent slowing of borrowing by individuals.

Price pressures in the region have shown no appreciable change recently, according to business contacts. Most of the manufacturers contacted for this report said both input and output prices have been steady. Those firms that have experienced some increases in input costs also indicated that they have been unable to pass these increases on in the prices they charge for the products they make. Retailers reported that price competition among stores remains strong and that consumers are quick to shift their patronage to lower price sellers for any given product. Some merchants noted that offering attractive prices will be an important component of their marketing strategies during the upcoming holiday shopping period.

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Last update: October 29, 1997