October 27, 2004 Federal Reserve Districts Third District--Philadelphia

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Economic activity in the Third District increased in October. Manufacturers reported a rise in the number of orders and shipments compared with September. Retailers indicated that sales of general merchandise were up from the previous month and year; however, auto sales slowed in October following a strong showing in September. Banks have had gains in overall lending. There has been modest improvement among service sector firms. Employment agencies reported steady hiring by their client companies. The outlook in the Third District business community is generally positive. Manufacturers expect increases in shipments and orders during the next six months. Most retailers anticipate steady improvement in sales or a slight pickup in the growth rate. However, auto dealers forecast a steady sales rate, at best, for the balance of the year. Bankers expect growth in total lending to continue, although they anticipate a slowing in residential mortgage activity. Service sector companies expect further improvement in the months ahead and possibly a quickening in the pace of growth. Manufacturing Manufacturing activity in the Third District rose in early October at about the same pace as in September. Nearly four out of 10 companies contacted for this report indicated that their rates of shipments and orders were up compared with the previous month, while around two out of 10 reported a decrease. Overall, order backlogs and delivery times at area plants were steady. Increases in new orders were relatively stronger for firms producing chemicals, petroleum products, and industrial materials and equipment. Producers of lumber products, furniture, and transportation equipment generally had slower order rates in early October than in September. Around half of the manufacturing firms indicated that the prices of the goods they purchase rose from September, and around one third have raised the prices of the products they make. Many firms expressed concern about continuing increases in the costs of fuels, steel, and employee health insurance. Manufacturers have reported rising costs since the spring. In recent months the number of firms raising their own prices has increased. The region's manufacturers expect further expansion in business activity. Almost half of the firms surveyed in early October expect increases in shipments and orders, and less than one in 10 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 Retail sales of general merchandise in the Third District rose in early October compared to sales in September and in October of last year. Department stores and clothing stores had somewhat better results than other types of stores as the arrival of cooler weather prompted sales of fall apparel and other seasonal merchandise. The recent pace of sales has been roughly in line with most merchants' expectations. However, some women's clothing stores indicated they have not achieved the sales gains they had expected despite generally good sales of fall clothing styles. Retailers expect modest improvement in sales in the final quarter of the year. Early forecasts of sales for the Christmas holiday shopping period are that the year-to-year gain will match or slightly exceed the annual sales increase posted so far this year. Auto dealers reported a slowing in sales in October, following strong results in September. Dealers said the outlook for the rest of the year is uncertain, but several expect manufacturers to step up promotions in order to maintain sales rates close to the pace of recent months. Finance Outstanding loan volume at Third District banks was on the rise in October, according to banks contacted for this report. There have been gains in all major credit categories. Commercial and industrial loans grew modestly, as borrowing moved up among firms in a variety of industries. Bankers continued to report strong competition in business lending among bank and nonbank lenders, especially for intermediate term, fixed-rate loans. Residential mortgage lending has continued on an upward trend. Consumer credit has risen, with increases in credit card lending and some growth in home equity lending as well. Bankers in the District generally expect loan growth to continue at about the current pace. They anticipate further gains in business lending, and some commercial bank lending officers believe growth in business lending could strengthen a bit. Bankers expect continued moderate growth in consumer lending, but they anticipate an eventual slowdown in residential mortgage activity. Services Most of the Third District service firms contacted for this report indicated modest improvement in business conditions in the past month. There has been some growth in information technology services. General business services activity has been on the rise, and the pace of growth has picked up somewhat. Trucking, rail, and ocean shipping companies have had growing activity, and some firms have raised prices as their costs for fuel and equipment have risen. Most of the service sector firms surveyed anticipate slightly better growth in business over the upcoming winter than they had during the summer. Temporary and permanent 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 for the balance of the year. Manufacturing and trade firms and educational institutions have relatively stronger hiring plans than do employers in other sectors. Return to top New York Cleveland