January 21, 1998 Federal Reserve Districts Third District - Philadelphia

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Economic activity in the Third District continued to grow at a moderate rate in December and January. Manufacturers reported increases in shipments and orders in January compared with December, although there has been a reduction in orders from Asia. Retailers generally met expectations for increases in holiday sales of around 4 percent, in current dollars, from the prior year. Auto sales have been steady. Bankers indicated that business and real estate lending were growing in January, although consumer lending had eased seasonally. Looking ahead, most of the Third District business contacts surveyed for this report expect moderate growth to continue. Manufacturers expect the overall pace of business to stay on an upward trend, although some firms with Asian customers said orders from that region will probably decline further. Retailers expect moderate growth in 1998. Bankers said they anticipate continued gains in business and real estate lending. Manufacturing Third District manufacturing firms contacted in early January reported improved business, on balance. About one-third said shipments and orders were rising, and fewer than one-fourth reported declines. Order backlogs, which had been falling since last fall, turned up for area firms, on the whole, although the rebound appeared to be slight. Employment at area industrial plants increased slightly in January compared with December, but work hours have been steady. Manufacturers continued to report difficulty finding skilled technical workers. Among the major industrial groups in the region, demand seemed to be strongest for lumber, paper products, and nonelectrical machinery. Producers of industrial equipment and building materials reported declines in orders from Asia, and food processors generally reported a seasonal slowdown in their industry. Some area firms that face import competition expressed concern that foreign producers will increase shipments and reduce prices, but none of the companies contacted for this report has seen this occur yet. Industrial prices have been generally steady, according to local firms. Three-fourths of the firms polled in early January said they were holding the line on the prices of their products, and around nine out of ten said the costs of the goods they purchase have been steady as well. Looking ahead, Third District manufacturers expect moderately increased demand for their products, although they do not expect order backlogs to grow. On balance, firms in the region plan to add workers during the next six months and slightly increase capital spending. Retail Retail sales in the region met merchants' expectations for the Christmas shopping period overall, although performance varied considerably among stores. Most stores specializing in computers and other consumer electronic items had good year-over-year increases, but some apparel stores and department stores had just marginal gains despite heavy discounting. On the whole, according to reports from store executives, retail sales in the region probably increased around 4 percent, in current dollars, from 1996. Area merchants expect some seasonal slowing in January, but they expect sales to move back up quickly and return to a trend of moderate growth. Nonetheless, merchants said competition is strong, and profit margins remain under pressure. Third District auto dealers indicated that sales of new cars and light trucks have been running at a steady pace in recent weeks, but sales of used cars have slipped. With continued incentives from manufacturers, most dealers expect sales to remain near the current pace, although some dealers anticipate a slowing in sales of sport utility vehicles and light trucks. Finance Third District bankers contacted in early January generally said that loan volumes were rising at their institutions. Most indicated that commercial and industrial lending was moving up moderately, with new business coming mainly from middle market companies seeking either working capital or short-term financing to facilitate acquisitions. Commercial real estate lending was also said to be on the rise, with borrowing by well-capitalized developers of office and retail properties as well as some residential developments. Several bankers noted that residential mortgage lending has moved up recently, for both refinancing and home purchases. In contrast, consumer lending was described as slow, due mainly to seasonal factors. Several bankers noted that deterioration in personal loan portfolios, particularly credit card loans, appeared to be leveling off. In their outlook for 1998, Third District bankers see continuing growth in commercial lending, but they expect competition among lenders to remain strong. They are concerned that loan margins will remain under pressure in the wake of the recent general decline in interest rates. Bankers expect real estate lending to continue moving up also, as construction activity expands and home sales increase in some parts of the District. Return to top New York Cleveland