December 9, 1998 Federal Reserve Districts Third District - Philadelphia

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Reports from most sectors of the Third District economy indicate healthy economic conditions, although weakness persists in manufacturing. Area industrial firms continue to report slowing shipments and orders. Retailers said sales for Thanksgiving weekend were good. Auto dealers saw a slight improvement in sales in November compared to October. Bankers reported generally steady loan volumes, although several noted slight increases in residential mortgage lending for new-home purchases. Real estate markets were strong, with continuing demand for offices and industrial buildings and a good pace of home sales. The consensus outlook is for further modest growth in 1999. Manufacturers predict a slight rebound in demand for their products. Retailers foresee continued growth near the current pace. Bankers expect general business activity in the region to continue to move upward, albeit at a somewhat slower rate. Real estate contacts see no signs of a near-term slowing in home sales or commercial leasing and acquisition. Manufacturing Manufacturing activity in the Third District slipped in November. Industrial companies in most of the region's major goods-producing sectors reported a slower rate of shipments and orders in November than in October. Industrial firms continued to report weakness in Asian markets. In addition, firms producing primarily for domestic markets indicated that demand for agricultural equipment and primary metals was also slowing. On balance, surveyed firms reported decreases in order backlogs and shortened delivery times. A reduction in working hours during November was further evidence of slackening in the District's industrial sector. Looking ahead, area manufacturers expect business to pick up in the next six months, although they are not forecasting strong improvement. Slight gains in shipments and orders are anticipated, but employment is expected to decline somewhat. Some companies whose business has increased sharply in the past few quarters, notably makers of transportation equipment and home building materials, expect growth to ease next year. Prices in the industrial sector have been mostly steady. Three-fourths of the firms polled in November indicated that the prices of both inputs and outputs have not changed from the prior month, and there were more reports of price cuts than price increases. The consensus forecast among surveyed firms is that prices will remain mostly level for at least the next six months. Retail Most Third District retailers reported that sales during the Thanksgiving weekend were in line with their expectations. Sales increases for most of the stores contacted were in a range of 4 to 6 percent, in current dollars, from the year-ago period. As has been the case for much of the year, discount stores had better results than most other types of stores. Sales were strong for toys, jewelry, and traditional gift items, such as sweaters and jackets, but sales of winter coats and other outerwear were hampered by the warm weather that prevailed over the weekend. In general, retailers forecast a good holiday season, with a year-over-year increase for the fourth quarter about in line with the Thanksgiving weekend's store average of 5 percent. Merchants expect the high level of consumer confidence to bolster sales into the new year. Auto dealers reported a slight increase in sales in November compared to October. Compared to year ago, however, the sales rate was flat. Nonetheless, dealers were generally satisfied with the pace of business, although a few still said they were unable to obtain as many popular new models as they could sell. Finance Bankers contacted for this report generally indicated that loan volume outstanding at their institutions was level during November. Business loans were said to be steady, and most bankers continued to describe the market as very competitive. Residential mortgage demand was strong at all of the banks surveyed, and most of the activity was for refinanced mortgages, although some banks noted increases in mortgages for new purchases. Several banks reported that borrowers who refinanced were consolidating some other debt into the new loans. This shift and an increased usage of home equity lines were cited as reasons for the flatness in consumer loan volume that most banks reported. Looking ahead, most of the bankers interviewed said they did not expect any major changes in current trends. Some reported that their reviews of business plans with commercial customers factor in slower growth in 1999 than this year. Similarly, banks' consumer lending plans are based on some slowing in spending next year. Real Estate and Construction Commercial real estate remains healthy, according to contacts in most of the important market areas in the District. Construction of new offices has been continuing at a good rate, and sales and leasing activity increased during the third quarter. Rents and vacancy rates have been mostly steady in the region, except in some markets where demand for space has been increasing. Speculative construction is under way in suburban locations that have had increases in rental rates and declining vacancy rates. For suburban areas as a whole, recent estimates of the vacancy rate average around 10 percent. In the Philadelphia central business district, the vacancy rate is 16 percent. Real estate contacts say demand and supply of office space in the city has begun to move into balance as expansion by law firms and service companies has begun to offset the impact of a recent series of corporate downsizings and relocations. The vacancy rate for industrial buildings in the region has declined from 12 percent at mid-year to 11 percent at the end of the third quarter. According to real estate firms, new space has been coming on line at a rate sufficient to keep rents from rising in most areas; however, the conversion of older industrial buildings into retail and office space in some suburban locations has pushed up industrial rental rates in those places. Residential real estate activity has picked up after a brief interruption that real estate professionals attributed to financial market volatility. Sales of both existing and new homes have risen in the past month. Builders and real estate agents report that demand has risen for "move up" buying, but price appreciation on existing homes and price increases for new homes were said to be slight. Return to top New York Cleveland