May 6, 1998 Federal Reserve Districts Third District - Philadelphia

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Business conditions in the Third District were mainly positive in April. Manufacturers indicated that activity increased during the month, although the rate of gain had eased from the first quarter. Retail sales have been rising, but sales of autos have been virtually flat. Bank lending has edged down because of a decline in consumer loans while commercial and real estate loans have increased. Industrial prices in the region have been steady, and retail prices appear to be mixed. Selling prices for autos have softened, but prices for general merchandise have firmed as stores have put spring merchandise on display after markdowns to clear out winter merchandise. Manufacturing Industrial activity in the Third District continued to move upward in April, according to reports from manufacturers, but the rate of gain appeared to be easing just slightly from the first quarter's pace. About one-third of the firms contacted were posting increases in orders and stepping up shipments during April; for half of the firms reporting, these measures were steady. Less than one in five companies said demand for their products had decreased. Most of the firms surveyed said order backlogs and delivery times were steady. Increased business was noted in nearly all of the major manufacturing sectors in the District, with gains especially strong for makers of paper products, rubber, and plastics. Some slowing in demand was reported by producers of apparel and primary metals. Employment at Third District manufacturers was steady, on balance, in April, and weekly work hours edged down. Nonetheless, firms in the electrical, electronics, and instrumentation sectors were hiring more workers. Electronics companies continued to report difficulty recruiting qualified engineers and technicians. Increased supply has made some markets more competitive. Firms in the metals and metal products industry indicated that foreign competition has increased. Chemical producers said selling prices were being kept in check as a result of recent expansion in domestic capacity. For industrial prices in general, eight out of ten of the companies polled for this report said their input costs have been steady, and nine out of ten said they were keeping the prices of their own products level. Retail Retailers in the region gave generally upbeat reports for April, after some slowing in sales growth in March. Merchants said the March slowdown was due to the late Easter this year and mild weather, which hampered sales of goods that usually are in greater demand in winter months, such as outerwear and automobile batteries and parts. Some strength has returned to sales since mid-April, although year-over-year gains for the month have slipped from the increases posted in January and February. Retailers said they had to mark down winter merchandise sharply to clear inventories, but sales of spring merchandise, mainly apparel and lawn and garden equipment, have been good, bolstering selling margins. Sales of home furnishings and appliances have also been healthy. Third District auto dealers gave mixed reports for April; most import dealers said sales were on the rise, but many of the domestic dealers surveyed indicated sales had slowed recently. On balance, sales of cars and light trucks in the region appear to have edged down from the first quarter's pace and from April of last year. Dealers generally indicated that inventories were in balance with sales, despite the recent slowdown. Both domestic and import dealers were offering rebates and other incentives to boost sales, reducing effective selling prices. Sales of heavy trucks have risen sharply in the region since the beginning of the year. Dealers reported that some manufacturers are currently quoting delivery times of up to one year for new orders. Demand for trucks with advanced technology features is said to be especially strong. Finance According to bankers contacted for this report, total loan volume outstanding at major Third District banks has been edging down since the beginning of March, mainly because of a decline in consumer lending. While bankers believe the decline is largely the result of slackening demand for credit, several noted that they have been implementing stricter credit standards, which has resulted in some loss of customers as well as improvement in the quality of banks' consumer loan portfolios. Residential real estate lending activity has increased at financial institutions in the region. Applications for both refinanced and new purchase mortgages have increased. Borrowers have been favoring fixed-rate loans for mortgages and for home equity loans. Loans to businesses have increased modestly in the Third District. Commercial bank loan officers reported that demand for credit to support capacity expansion was common among small and middle market companies. There were some reports of firming interest rates for loans to companies of this size. In contrast, some bankers reported that interest rates for large loans remained low, and they were turning down offers to participate in these credits. Return to top New York Cleveland