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Federal Reserve Districts

Third District--Philadelphia

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Business conditions in the Third District improved slightly in September. Manufacturers reported increases in orders and shipments for the month. Retail sales of general merchandise in September were up slightly from August and from September a year ago. Auto and light truck sales eased in September from August but were up somewhat on a year-over-year basis. Bank lending has been rising, with advances in business, consumer, and residential mortgage lending. Business at service firms has begun to show some improvement, although the gain has been slight.

The consensus forecast in the Third District business community is for slowly improving conditions. Manufacturers forecast increases in shipments and orders during the next six months. Most of the retailers surveyed in September expect sales in the fourth quarter of this year to exceed sales in the fourth quarter of last year, and some store executives have recently raised their forecasts. Auto dealers anticipate steady sales. Bankers expect continued slow growth in lending. Service companies expect some growth, but in general they anticipate only slight gains in the next two quarters.

Manufacturers' shipments and orders increased in September compared with August, continuing the upward trend that began in the summer. Although around half of the firms polled in September indicated that their shipments and orders were running at steady rates, nearly a third reported gains. Order backlogs at area plants edged up in September. Backlogs have been moving up slowly for the past several months. Firms in most of the District's major manufacturing industries reported increased demand for their products in September, but producers of transportation equipment and apparel noted some declines in orders.

Looking ahead, manufacturers in the region expect further improvement. More than two-thirds of the firms contacted for this report expect increases in shipments and orders, and virtually none expect decreases during the next six months. Around one-third of the manufacturers surveyed in September have recently increased planned production for the fourth quarter compared with plans made earlier this year, and only one in ten have trimmed production schedules for the quarter. More area manufacturers plan to increase rather than reduce capital expenditures in the next six months, but not by a large margin.

Third District retailers contacted for this report indicated that sales in September were slightly above August levels and a bit above the sales level posted in September of last year. Merchants generally indicated that some easing in sales growth was expected in September after income tax rebates and back to school demand pushed up sales in August. There was a pickup in sales of fall apparel and accessories during September, and sales of furniture and home furnishings remained strong. With an apparently improving trend of sales, stores have been able to limit discounting of fall merchandise compared with the extensive markdowns they made to clear out summer goods.

Third District retailers expect sales in the final quarter of this year to exceed the same period a year ago, and some have recently raised their forecasts. Merchants believe consumer confidence is building slowly and that shoppers will begin to make purchases that they have been postponing. Nevertheless, in a continuing effort to contain costs, many stores are limiting their inventories and implementing measures to reduce order cycle times.

Auto dealers reported an easing in the sales rate in September after very strong August sales. Compared with a year ago sales in September were up slightly. In general, dealers indicated that inventories were at appropriate levels, but some dealers said they still had 2003 models that they were trying to clear out. Dealers expect sales to run at a roughly steady rate during the rest of the year.

Outstanding loan volume at Third District banks was on the rise in September. Banks reported modest increases in commercial and industrial loans, with slightly higher loan demand from firms in a fairly wide range of industries. Consumer credit also expanded, for both personal loans of various kinds and credit card lending. Besides the increase in personal loans booked during September, some banks noted that they approved personal lines of credit during the month that have not yet been fully utilized. Banks generally reported continuing increases in overall residential real estate lending, but most of those contacted for this report said refinancing activity has slowed.

Bankers in the District expect continued slow growth in lending through the rest of the year. Some said growth in business and personal loans could accelerate somewhat next year if the pace of business activity in the region quickens. Most of the lending officers surveyed in September expect lending for home purchase mortgages to continue to increase in tandem with any increase in home sales in the region, but they anticipate further declines in refinancings. In general, bankers in the District indicated that credit quality for both personal and business loans has been steady, but some noted that debt service to income ratios have risen for both individual and business borrowers.

Stock brokers and investment management companies indicated that cash flows into most types of funds and financial instruments were steady in September. Executives of the nondepository financial firms contacted for this report said investors are still concerned about fundamental economic conditions. They do not expect investment activity to pick up significantly until employment begins to move up consistently.

Service firms contacted in September generally reported steady or slightly growing activity. Demand for general business services has been edging up and the region's health services sector continues to advance, but telecommunications activity remains nearly flat. Several local service sector firms indicated they see the beginnings of rising demand, although most of those surveyed expect growth in the next two quarters to be slow. Some noted that their corporate customers are still emphasizing cost-cutting, and are limiting their use of outside services until overall business conditions show more significant improvement.

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Last update: October 15, 2003