April 21, 2004 Federal Reserve Districts Third District--Philadelphia

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Economic activity in the Third District expanded in March and the improving trend continued into April. Manufacturers reported increases in orders and shipments in March and further gains in early April. Retail sales of general merchandise in March were above the level of the prior year, and early April results indicated ongoing upward momentum. Auto and light truck sales rose from February to March but were lower than in March of last year. Bank lending has been moving up slowly in the past few weeks. Investment companies have been posting strong increases in business. Service sector firms reported growth, although the strength of the gains has been mixed. The outlook in the Third District business community is generally optimistic, although the pace of improvement is not expected to pick up appreciably. Manufacturers forecast increases in shipments and orders during the next six months. Retailers anticipate a moderate increase in sales for the spring season compared with a year ago. Bankers expect business and consumer lending to increase, but have mixed views on the course of residential mortgage activity. Service companies anticipate continued moderate growth. Manufacturing Third District manufacturers reported gains in activity in early April, maintaining the upward momentum from March. Nearly half of the manufacturing companies contacted said their orders and shipments were on the rise, and less than one-fifth said orders and shipments were declining. On balance, order backlogs at area plants leveled off in April after modest increases during the winter. Firms in all of the major manufacturing sectors in the region except transportation equipment generally indicated that business conditions were improving. Increases in demand were especially strong for firms producing lumber products, petroleum products, industrial materials, and metal products. Manufacturing firms in the region continued to report rising prices in April. Goods whose prices were frequently mentioned as high or rising include natural gas, oil, steel and other metals, plastics, lumber, and various building materials. Additionally, several manufacturers indicated that steel and iron supplies are limited. The region's manufacturers expect business activity to remain on an upward trend. More than half of the firms contacted for this report expect increases in shipments and orders, and less than one in five expect decreases during the next six months. Area manufacturing firms are scheduling increases in capital spending and are planning to add employees and extend working hours in the next six months. Retail Third District retailers surveyed in early April generally reported that sales were rising compared with the sales of March and April of last year. Some merchants said cold and rainy weather at the start of April slowed the rate of sales growth, but the majority of retailers indicated a steady pace of growth in store traffic and sales. Some store executives noted that the average customer purchase has increased, and some reported that sales of luxury items have risen. Sales of spring apparel increased in line with merchants' plans, and sales of jewelry were also on the rise. Retailers generally described inventories as appropriate for the current sales rate, with most spring merchandise delivered. Some store executives said they were continuing to implement efficiencies in the supply chain that were permitting further reductions in delivery times and lower average inventory levels. Third District retailers expect sales for the spring season to be above the same period last year. Most store executives said the gain will be moderate, but some have revised their forecasts up slightly. Several retailers noted that the costs of building maintenance and construction have begun to increase noticeably, although most reported that the costs of goods have been mostly steady. Auto dealers reported a rise in sales in March from February, but a slight decline from March a year ago. Dealers indicated that sales of most foreign nameplates have been rising compared with domestic makes, although some imports appeared to be losing ground. Dealers generally expect sales to continue around the current rate for most of this year, but some are growing concerned that it will be difficult to maintain the high sales rate of the past several years. Finance Outstanding loan volume at Third District banks was moving up slowly in April, according to banks contacted for this report. Commercial and industrial loans were on the rise as the credit needs of middle-market firms in the region have risen. Residential real estate lending continued on an upward trend. Consumer credit has been expanding, as well. Bankers in the District generally expect lending to grow moderately this year, although some believe a slight pickup in the rate of growth is possible. They expect business lending to increase further, although several indicated that competition among lenders is limiting loan income. Bankers expect consumer lending to expand also. Although demand for residential mortgage lending is currently high, bankers are uncertain that the recent pace of growth in mortgage lending will persist. Investment companies in the District reported that cash inflows have been strong since the beginning of the year, and they expect high rates of investment by individual and institutional investors to continue through the rest of the year. Executives at investment companies said investor confidence appears to be rising, and that recent adverse publicity about some mutual funds does not appear to be damping the public's interest in stock and bond funds in general. Services Most of the Third District service firms contacted in April reported improving business, although the scale of gains varied. Information technology firms have had some accelerating increases in activity. Contacts said system upgrades and maintenance, business applications, and information security measures have been the primary areas in which demand for information technology services has been growing. Among other business services, there has been an increase in consulting activity and very slight gains in building services and basic business support services. Trucking firms report steady growth in activity. Most service sector contacts expect business to continue to advance at around its current growth rate. Temporary and permanent employment agencies in the region reported an increase in demand for workers since the winter months. The increase in hiring is coming in construction, trade, services, and finance. Placement offices at colleges and universities in the region reported that recruitment is up compared with last year. Industry sectors that are more active this year are finance, real estate, media, healthcare, information technology, and architectural services. Return to top New York Cleveland