December 4, 1996 Federal Reserve Districts Third District - Philadelphia

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Economic activity in the Third District was up modestly in November according to reports from the region�s businesses. Manufacturers noted increases in orders and shipments, although employment in this sector appeared to be just steady. Retailers said customer traffic increased near the end of the month and sales picked up seasonally. Auto dealers reported that sales for the month were steady and at a healthy pace. Inventories at both manufacturers and retailers appeared to be in line with sales. Bankers generally said overall loan growth continued during November but the pace of growth slowed. Consumer and real estate lending remained on an upward trend, but commercial and industrial lending was flat. Looking ahead, Third District business contacts see further improvement, but they do not expect strong gains. Manufacturers forecast increasing demand for their products that will lead to some stepped-up hiring in the next six months. Retailers forecast about a 5 percent increase in the dollar value of sales this Christmas season compared to a year ago. Auto dealers expect sales to continue at their current rate. Bankers expect consumer and real estate lending to continue moving up, although they anticipate some slowing in the growth of consumer lending, especially credit cards, as they implement somewhat tighter credit standards. They expect business loan volumes outstanding to remain near current levels. Manufacturing Manufacturing activity in the Third District moved up slightly in November, according to reports from plants in the region. About three of ten of those polled noted gains in orders and shipments while two of ten reported declines. Most of the drops were reported by manufacturers of durable goods, while producers of nondurable goods generally experienced improved business in November compared to October. Despite the apparent lower demand for durable goods, firms in this sector reported declining inventories, on balance, and little change in working hours. Producers of nondurable goods gave similar reports. Total employment at Third District manufacturers in all sectors was steady during the month. Industrial prices in the region were mainly steady, according to comments from manufacturers. Eight of ten said both their input costs and their own selling prices were unchanged in November compared to October. Two-thirds of the firms contacted for this report expect prices to remain level during the next six months, although one-third anticipate increases in the costs of the goods they purchase and one-fifth plan to raise the prices of the products they make. Nearly half of the manufacturers polled in November expect demand for their products to increase during the next six months while fewer than one-fifth expect demand to decline. One-third of the surveyed companies plan to hire more workers over the period, twice the number of firms planning employment cutbacks. Retail Most of the Third District merchants surveyed in November said customer traffic had increased sharply recently and the seasonal upswing in sales had begun. Department stores, in particular, noted a higher sales rate in November compared to October, although some store executives cautioned that promotional pricing was responsible for a significant share of the gains. For all types of stores, inventories were generally described as consistent with the current sales rate. While some merchants expressed concern that there will be fewer shopping days than usual between Thanksgiving and Christmas this year, most said consumer confidence appears to be high and they do not expect calendar effects to have a negative impact on sales. Retailers forecast increases in the dollar value of sales for the Christmas shopping period of about 5 percent, on average, above last year�s level. Retailers of apparel, toys, books, and recorded music expect to match or exceed the gains they have posted in recent years while some stores specializing in consumer electronic products anticipate lower annual increases this season than in past years. Auto dealers in the region indicated that sales were steady and at a healthy pace in October and November. They expect a seasonal slowing in December and January, but generally anticipate that sales will return to their current rate after that. While some dealers expressed concern that rising consumer debt levels may begin to trim auto sales, others cited continuing high measures of consumer confidence in support of optimistic expectations for sales in the near future. Finance Most of the Third District bankers interviewed for this report said loan volumes were growing slowly as consumer and real estate lending moved up while commercial and industrial loan levels were mostly flat. Credit card and direct personal loan volumes increased at most of the banks in the region in November. As bankers implement more restrictive credit standards to stem the increase in consumer loan charge-offs that they have experienced recently, they expect some slowing in the growth of consumer lending, absent seasonal factors. Despite such limitations, bankers continue to focus on consumer markets for new business, for both loans and investment products. Lending to businesses remains very competitive as nonbank lenders and banks not based in the region continue to solicit local firms. Bankers also said the market for real estate lending, both residential and commercial, is competitive on rates; they added, however, that commercial real estate borrowers are expected to have substantial equity interests in their properties. Return to top New York Cleveland