January 19, 2005 Federal Reserve Districts Third District--Philadelphia

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Business activity in the Third District expanded in December. Manufacturers reported increases in orders and shipments during the month. Retail sales of general merchandise during the holiday shopping period rose from the previous year, with modest gains for most stores and greater increases among luxury goods retailers. Auto sales were roughly steady during December. Banks reported that overall lending continued on an upward trend in December. Service companies generally reported a steady to slightly stronger pace of growth at year-end compared with the fall. Contacts in the Third District business community expect economic activity in the region to continue on an upward trend through the winter, and some contacts anticipate a slight quickening in the growth rate as the year progresses. Manufacturers expect increases in shipments and orders during the next six months. Retailers expect modest growth in sales during the year, but auto dealers expect sales to weaken. Bankers believe overall lending will continue to rise, although they do not anticipate much growth in residential mortgage loan volume. Service companies expect some pickup in the pace of growth for their businesses. Manufacturing Manufacturing activity in the Third District increased in December. Around four out of ten of the manufacturing firms surveyed during the month posted higher shipments and orders compared with the previous month, and less than two in ten reported decreases. Order backlogs at area plants edged up slightly from November to December although delivery times were unchanged. Business conditions varied among the major manufacturing sectors in the region. Growing demand was generally reported by makers of food products, apparel, electrical machinery, and transportation equipment. Some slowing in demand was reported by makers of lumber and wood products, paper products, and plastics. The region's manufacturers generally expect further gains in business activity. Just over half of the firms surveyed in December expect their shipments and orders to increase during the next six months, and around one in ten expect decreases. On balance, area manufacturing firms are scheduling increases in capital spending and planning to add employees. Although current conditions vary among the region's major manufacturing sectors, the outlook for the first half of the year is positive in almost all of them. Third District manufacturers continued to report rising prices, with about the same percentage of firms noting increases during December as in November. During the next six months almost two-thirds of manufacturers expect increases in input prices, and about one-half expect increases in the prices of their own goods. Retail Retail sales of general merchandise during the holiday shopping period were generally in line with merchants' expectations. Most stores reported year-over-year gains of around 3 percent, in current dollars. Stores specializing in luxury goods did better than other types of stores during the period, as they did through most of 2004; some posted year-over-year gains in excess of 10 percent. Merchants indicated that the extent of price markdowns in December and early January was roughly comparable to discounting in the previous year. In general, merchants reported that their inventories after the holidays were not excessive. Store executives forecast modest growth in sales during 2005. Those who commented on expansion plans generally indicated that they will open as many new stores this year as they did last year. Auto dealers in the region reported roughly steady sales in December, on balance, although results varied by dealership. In general, dealers selling domestic makes saw some slowing in sales, and dealers selling imports saw increases. Although manufacturers have maintained promotions on 2004 models and extended them to 2005 models, many dealers' inventories remained above desired levels. Dealers expect sales this year to be off at least a few percent from last year. Finance Outstanding loan volume at Third District banks rose in December, according to banks contacted for this report. Commercial and industrial loans have been growing, with new borrowing being done by firms in a wide range of industries. Bankers also reported increases in consumer lending, including credit cards and home equity lines. Banks generally indicated that growth in home mortgage lending has slowed. Bankers in the District expect overall lending to rise in 2005. They anticipate further gains in business and consumer lending, but little growth in residential mortgage loan volume. Investment companies and stockbrokers in the region have been receiving strong cash inflows, and most of the money has been directed toward equities. In response to the greater volume of business, some securities firms are adding employees and increasing their information technology capacity. Investment company executives expect business to continue to expand this year, but they do not expect stronger growth in 2005 than in 2004. Services Most of the Third District service firms contacted for this report indicated modest improvement in business conditions in the past few months, and some reported recent pickups in the pace of growth. Information technology companies indicated that demand for their services has strengthened as the result of improvement in their clients' business, an increase in information systems requirements to support regulatory compliance, and a growing need to upgrade computer systems generally. Other business services activity has been on the rise, and the pace of growth has increased somewhat. Most of the service sector firms surveyed expressed cautious optimism that growth in business this year will be stronger than last year. Employment agencies in the region reported moderate increases in demand for workers in the past few months, and they expect the pace of hiring to be steady through the winter. Companies in manufacturing, trade, and the financial sectors have relatively stronger hiring plans than do employers in other sectors. Return to top New York Cleveland