March 12, 1997 Federal Reserve Districts Third District - Philadelphia

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Reports received from Third District business contacts in February were mixed but, on balance, indicated some slight improvement in economic activity. Manufacturers posted gains in orders and shipments and reduced inventories. Department stores and discounters boosted sales in February, compared with the previous month and a year ago, through widespread price reductions, but small retailers generally did not experience any increases. Most auto dealers reported steady rates of sales during the month. Bank lending appeared to ease a bit as business loan volume remained nearly steady and a decline in consumer credit more than outweighed an increase in residential mortgage lending. Real estate markets have shown some improvement. Demand for office space has been reducing vacancy rates and giving some upward impetus to rents, according to property managers in the region. Residential real estate agents noted a recent pickup in sales of both new and existing homes, but they said price appreciation has been very slight. Home builders also noted increased demand but said buyers are cautious about prices. Manufacturing Manufacturers in nearly all the Third District�s major industrial sectors reported improved business in February. New orders increased at more than a third of the plants polled. The strongest gains were noted among producers of metals and metal products and chemicals; in contrast, apparel and furniture makers indicated a drop in demand during the month. Overall, area manufacturers stepped up shipments and reduced inventories. Employment at Third District plants has been steady, but the number of companies that plan to add workers has risen recently. Around four in ten of the firms that commented on employment plans said they intended to add workers by the middle of the year, while only one in ten planned to reduce employment. Industrial prices in the region have been mainly steady. Around three-fourths of the manufacturers reporting on prices indicated that both input costs and output prices have not changed since January. While there were slightly more reports of rising than falling prices, manufacturers continued to note that their ability to set prices for their products was countered by foreign competition. Suppliers to the automotive industry also noted continuing pressure from their customers to limit or reduce prices. Retail Retailers in the region gave mixed reports for February. Department stores and large discount chains indicated sales were strong but price cutting was pervasive. According to store executives, aggressive marketing applied to spring goods across the board and was not a response to inventory levels, which were generally described as lean. In contrast to chain stores, small specialty retailers said their sales were merely even with or slightly below year-ago levels, in dollar terms. Comments from retailers suggested that consumer confidence is relatively buoyant, and the early discounting of spring merchandise is primarily a competitive tactic rather than a response to slow sales. Few retailers seemed concerned that the early push for spring sales would result in lower than usual sales later in the season, but some did say that price-cutting might limit profitability in the current quarter. Most of the auto dealers contacted for this report said sales ran at a level pace during February, although a few said sales of some popular sport sedans increased. Inventories were generally described as ample but not high. Finance Total loan volume outstanding at large Third District banks eased a bit in February. Gains in residential mortgage lending were being more than offset by declines in consumer lending. Bankers generally indicated that the drop reflected a seasonal paydown in credit card balances; however, some bankers believe that when net growth in borrowing resumes it might be slower than in the past few years because of the implementation of more restrictive credit standards on both new and existing accounts. Commercial loan volumes have fluctuated since the beginning of the year but have shown little overall change. Bankers interviewed in February foresee just slight growth in the months ahead, mainly from local middle market companies. In general, bankers expect commercial lending to just track the region�s economy, which they anticipate will grow slowly. Real Estate and Construction Commercial real estate agents in the region said markets were improving as 1997 began. Office vacancy rates were estimated to range from 9 to 16 percent in suburban office markets, and they were falling while rental rates were moving up. In the Philadelphia central business district, the vacancy rate has not shown much improvement, although rents were firming. In both the city and suburbs, demand for Class A space was much stronger than demand for lower quality space. In a few tight suburban markets, Class A rents were said to have risen by around $1 per square foot in the past three months and, at $20 per square foot, just exceeded rates for similar space in the Philadelphia central business district. Demand for industrial space remained strong throughout the region, although construction has been keeping pace with new demand, leaving vacancy rates and rents nearly steady. Residential real estate agents and home builders also reported some signs of increased activity in February. Realtors said sales of both new and existing homes were picking up faster than they had anticipated. They cited a variety of explanatory factors: improved consumer confidence, relatively low and steady mortgage interest rates in the first two months of the year, and mild weather. Builders generally, though not unanimously, said they were signing a growing number of contracts for new homes in a variety of price ranges. Realtors noted that price appreciation for existing homes has been very slight, and builders indicated that competition among contractors and price resistance on the part of buyers were limiting their ability to raise prices. Return to top New York Cleveland