July 28, 2004 Federal Reserve Districts Third District--Philadelphia

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Economic activity in the Third District was rising moderately in July. Manufacturers reported increases in orders and shipments compared with June. Retailers indicated that sales of general merchandise were strengthening in early July after a slight dip in June. Auto and light truck sales slowed in June and were about steady in early July. Banks reported that overall lending continued on an upward trend, with increases in most credit categories. Service sector firms have seen increased demand and employment agencies reported stepped-up hiring. The outlook in the Third District business community is generally positive. Manufacturers expect increases in shipments and orders during the next six months. Retailers expect a good pickup in sales for the back-to-school shopping period. However, auto dealers forecast a fairly steady sales rate in the second half of the year, somewhat below the pace of the first half. Bankers expect moderate growth in lending to continue in the months ahead. Service sector companies are optimistic that business will continue to expand. Manufacturing Manufacturing activity in the Third District continued on an upward trend in July, and the number of firms reporting gains increased slightly compared with June. About half of the companies surveyed in July posted higher shipments and orders than in the previous month, and around one in ten reported decreases. Overall, there were increases in order backlogs and delivery times at area plants. Increases in new orders were especially strong for firms producing industrial materials and equipment, building materials, and a variety of paper products. Order backlogs have risen markedly among makers of petroleum, metal, and lumber products. Around half of the manufacturing firms polled in July indicated that the prices of the goods they purchase rose during the month, although some noted that prices for steel and lumber appeared to be leveling off. Many firms continued to express concern about continuing high prices for natural gas. Around one-third of the firms surveyed for this report implemented price increases in the past month for the products they make. About one-third of the firms indicated that they have raised wages recently; most of these reported that the increases were between 2 and 4 percent. The region's manufacturers expect further expansion in business activity. Half of the firms surveyed in July expect increases in shipments and orders, and less than one in five expects decreases during the next six months. Area manufacturing firms are scheduling increases in capital spending and are planning to add employees in the next six months. Retail Third District retailers generally reported a slowing in sales from May to June but some strengthening in early July. Most of the store executives contacted for this report attributed the slower sales in June to unseasonably mild weather, which restrained sales of fans, air conditioners, warm weather apparel, and other seasonal merchandise. Merchants also said store traffic was off as outdoor activities took precedence over shopping for many consumers. Retailers said the slackening in sales in June left some stores with higher than planned inventories, and these stores were implementing price discounting to move summer merchandise. However, most stores have been keeping inventories relatively light, so extensive discounting is not anticipated. Several stores have already begun back-to-school promotions, and most retailers expect a healthy pickup in sales as the back-to-school shopping period gets under way. Auto dealers reported a slowing in sales in June compared with May, and roughly steady sales in early July. Inventories have increased well above desired levels at many dealers. On balance, dealers in the region expect total vehicle sales to be steady during the rest of the year, but at a lower level than during the first half of the year. They anticipate declining demand for light trucks to be offset somewhat by higher demand for cars. Finance Outstanding loan volume at Third District banks rose slightly in June, according to banks contacted for this report, and the trend has continued in July. Commercial and industrial loans were growing moderately, with much of the gain coming from rising credit needs of service companies and continuing growth in lending to residential construction firms. Residential mortgage lending has also continued on an upward trend. Consumer credit was rising, with moderate increases in credit card lending and somewhat stronger growth in other types of personal loans. Contacts at the region's banks and financial services companies continue to remark that strong competition among bank and nonbank lenders is limiting increases in loan interest rates. Bankers in the District generally expect overall lending to rise during the rest of the year. They anticipate further moderate gains in business and personal lending. Many expect lending for residential construction and sales to peak soon, but they note that activity in this sector has yet to show signs of easing. Services Most of the Third District service firms contacted for this report indicated some recent improvement in business conditions. There has been increased activity in accounting and engineering services and some strengthening in demand for information technology services. General business services activity has also picked up somewhat. Trucking firms reported growing demand for their services throughout the region. Most service sector contacts express cautious optimism that business conditions will continue to improve. Temporary and permanent employment agencies in the region reported increasing demand for workers. Firms in a broad range of industries are seeking sales and marketing professionals, and there has been growing demand for information technology workers, especially programmers. While staffing companies indicated that firms are stepping up employee searches and hiring, they noted that most companies are adding workers only as their business picks up and staffing needs become pressing. Return to top New York Cleveland