March 18, 1998 Federal Reserve Districts Third District - Philadelphia

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Business conditions in the Third District in February and early March were mixed but positive overall. Manufacturers reported continued increases in shipments and orders. Retailers said sales were moving up, but auto dealers said sales had eased. Bankers reported some slowing in overall loan demand as lending to individuals declined, but they were generally posting gains in real estate and business lending. Both commercial and residential real estate markets were described as healthy by real estate agents and home builders. Commercial construction was said to be increasing, and residential construction was characterized as steady at a fairly strong rate. Contacts in the retail and real estate sectors cited mild weather as a boost to current activity, but fundamental conditions were also considered to be good, and further gains are anticipated in the spring. Manufacturing Manufacturers reported continued improvement in business in February compared to January. Shipments were up at one-third of the firms surveyed, and four out of ten said new orders had increased, twice the number reporting decreases. Firms in nearly all major industry sectors reported improvement; however, several companies commented that orders from Asian customers were declining. The industries most affected were machinery, chemicals, and high-technology products. On balance, Third District manufacturers boosted employment in February. Around 20 percent of the firms contacted added jobs in the month; 75 percent held employment steady. Industries with employment increases were textiles, machinery, transportation equipment, and instruments. Employment eased among food processors and producers of primary metals. In other industries, mainly consumer goods manufacturing, employment was steady. Industrial prices in the region remain nearly steady. More than three-fourths of the manufacturers contacted for this report said the prices of the goods they buy were unchanged from January to February, and nine-tenths said the prices they charge for their products have been level. Some firms said prices of the commodities they use have fallen recently, reducing their input costs, and several firms noted they were installing new equipment to increase production efficiency and reduce operating costs in order to keep output prices competitive. Retail Retail sales in the Third District have been moving up since the start of the year, according to merchants polled in early March. Based on these retailers' comments, sales in the region have been running approximately 4 percent above last year's pace, on a current dollar basis. Store executives believe mild weather boosted sales in January and February, but they said the usual spring pickup, especially in sales of apparel, appeared to be occurring in early March. Auto dealers generally reported a slowdown in sales during February and an increase in inventories except for some popular models. Sales of both cars and light trucks have eased from January's rate. Despite the current slowdown, most of the dealers contacted expect sales to improve this spring. Finance Most of the Third District banks contacted for this report indicated that their loan volumes outstanding were falling slightly. In recent weeks, real estate lending and lending to businesses have been increasing, but consumer lending has been declining. Both residential and commercial real estate lending were moving up at the region's financial institutions. Bankers noted increases in purchase mortgages and home equity loans. Although commercial real estate lending has increased, bankers said they were becoming increasingly selective, turning down prospective borrowers who have requested loans of higher amounts in relation to property values than has been the norm recently. Banks are actively soliciting new commercial and industrial loans, especially among middle market firms. Much of the slowdown in consumer lending has been in auto financing. Banks have been cautious in lease financing in response to declining residual values. According to some reports, auto manufacturers' finance subsidiaries have taken more of the lease financing business. Real Estate and Construction Commercial real estate agents reported that office vacancy rates declined from the third quarter to the fourth quarter of 1997 and rents rose. According to recent surveys by commercial real estate companies in the region, office vacancy rates dropped around 1 percentage point during the last quarter of 1997 to around 14 percent in central Philadelphia and 10 percent, on average, in suburban markets. Vacancy rates for Class A buildings were lower, but real estate agents said vacancy rates for less than Class A buildings were significantly higher and rents were lower. Demand for industrial space, primarily distribution facilities, remained high. Some speculative construction of offices and industrial buildings was under way in the region. Commercial realtors generally agreed that current rents and vacancy rates justify construction of more buildings, but some were concerned that an oversupply of space could develop if economic growth in the region eases. Residential realtors and home builders said sales of existing and new homes have been steady in the past month at fairly high levels. There has been some price appreciation for existing homes and increased demand for higher-priced new homes, although both realtors and builders said price increases have not been great. Realtors said some of the strength in home sales this winter, compared to last year, has been due to the mild weather, but they added that healthy employment conditions and the rising stock market have boosted buyers' willingness to make home purchases. Return to top New York Cleveland