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Federal Reserve Districts

Third District - Philadelphia

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Full report

Economic conditions in the Third District were improving modestly in November. Manufacturers' shipments and orders were moving up slightly. Retail sales have shown only slight improvement since October, with the increase primarily in apparel. Auto sales have been steady, but dealers' inventories remain high. Bankers generally noted some recent increases in borrowing by both businesses and consumers. Commercial real estate markets continued to tighten; office vacancy rates have declined slightly since mid-year, and construction of office and industrial buildings has increased. Home builders and residential real estate agents reported that demand for both new and existing homes has been healthy in November.

Manufacturing activity in the Third District expanded modestly in November, according to reports from industrial plants in the region. Around one in four of the companies contacted indicated that shipments and orders increased during the month; around one in five noted declines. Overall, order backlogs at firms in the District continued to drop. Producers of textiles and apparel noted slower business. Although some firms said this was a normal seasonal pattern, a few said they have been seeing falling demand for their products. Some companies that manufacture capital goods reported that the strength of the dollar and increased uncertainty in Asian markets have had a negative impact on their foreign sales. Producers of metals and metal products also noted slipping sales. In contrast, manufacturers of chemicals, machinery, and instruments said demand has picked up. Several firms in these sectors were increasing capital spending to add capacity.

Industrial prices remained steady at three-fourths of the firms contacted for this report. The number of companies noting increases, for both input costs and output prices, slightly exceeded the number reporting declines. Some companies commented that the magnitude of the increases was slight.

Retailers gave mixed reports for November. With the onset of cold weather, department and apparel stores had slight improvements from October. Stores specializing in hard goods and home furnishings had only steady sales, at best. Merchants have announced sales to prod early holiday shopping. Forecasts for the Christmas shopping period vary; on balance, store executives believe sales this year will probably be better than last year, but only by a small amount.

Auto dealers reported that sales have been running at a steady pace in recent weeks. The sales rate has been below dealers' expectations, however, and inventories have risen above desired levels. Manufacturers' rebates and financing incentives have been increased.

Loan volume outstanding at major Third District banks picked up slightly in November after being flat in October, according to lending officers contacted for this report. They indicate that companies in most of the region's industries have been seeking modest increases in financing to support growing business. Several banks noted that borrowing to refurbish and modernize office and retail facilities has increased significantly. Nonetheless, bankers continue to describe commercial and industrial lending as very competitive. Consumer lending, which slowed in October, was increasing in November at most of the banks surveyed. Bankers remain concerned, however, that the upward trend in consumer loan charge-offs has not yet peaked.

Real Estate and Construction
Commercial real estate agents reported an improvement in sales and leasing activity in the third quarter. According to one recent market survey, the office vacancy rate for the Philadelphia area, including southern New Jersey and northern Delaware, dropped from 12.6 percent at mid-year to 12.2 percent at the end of the third quarter. The vacancy rate in Philadelphia's central business district was relatively unchanged. Vacancies did decline in suburban markets around Philadelphia, and office construction activity increased in suburban markets. Rents for Class A space in the Philadelphia region as a whole moved up a bit. The vacancy rate for industrial buildings in the region increased to 13 percent at the end of the third quarter from 10 percent at the end of the second quarter, but real estate agents said the availability of modern facilities remains tight, and rents have increased slightly. Construction of industrial buildings has increased.

In general, residential builders reported healthy sales in November equal to the year-ago pace or higher. They also indicated that prices have increased. Customer traffic has been high at new residential developments and construction backlogs have been rising. Residential real estate agents indicated that sales of existing homes have been good and that the supply of homes for sale has declined. Demand has increased relatively more for newer, existing homes and homes in the higher price ranges than for older and less expensive homes. Overall, real estate agents said price appreciation for existing homes has been slight.

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Last update: December 3, 1997