November 4, 1998 Federal Reserve Districts Third District - Philadelphia

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Business conditions in the Third District appeared to be steady in most sectors in October, although there were reports of slowing activity in some industries. Manufacturers reported a slight decline in demand compared to the prior month. Retailers indicated that sales were steady from September into mid-October; however, auto dealers reported a drop in sales. Bankers generally indicated that loan volume outstanding has been level. Some banks have increased business lending in response to a rise in loan requests, but several have reduced their participation in commercial real estate financing. The outlook among firms contacted for this report is for very modest improvement, at best, during the balance of this year and in 1999. Manufacturers anticipate only nominal gains in shipments. Retailers forecast just slight improvement in sales for the rest of the year. Bankers expect the growth rate of economic activity in the region to ease and loan demand to slacken accordingly. On a positive note, business contacts expect employment to remain fairly healthy. Manufacturing Reports from Third District manufacturers in October suggested that conditions remain stalled. New orders at area plants were flat, on balance, and order backlogs declined. However, more firms reported increases in shipments than decreases, and inventories have fallen overall. Producers of chemicals, business machines, and electronic equipment continued to suffer from falling demand from Asian markets, but producers of steel and concrete products said increased funding of highway repair and construction in the region has boosted their sales. Manufacturers expect some improvement in new orders for their products in the next six months, although the number of firms forecasting increased shipments only slightly exceeds the number expecting decreases. On balance, firms surveyed in October plan marginal increases in employment and capital spending. A large majority of firms reported that both input costs and prices they charge for their own products have been steady, but about one in six said industrial prices in general had eased from the prior month. Firms competing with imports noted downward pressure on prices, and some other companies said domestic capacity in their industries was high and price competition was keen. Retail Third District retailers generally indicated that sales have been steady in the first half of October compared to September. Although some stores reported that sales of home furnishings and hard goods have been holding up well, most of the retailers contacted for this report said sales were somewhat below plan. In general, discount stores were posting better results than other types of stores. Overall, merchants said their inventories were at satisfactory levels. Some merchants noted that they have been cautious in ordering goods, and they intend to limit increases in inventories. Store executives in the region expect to post just slight year-over-year gains in the fiscal fourth quarter, which includes the Christmas shopping period. Some said a continuation of uncertainty in financial markets would have a noticeable negative effect on sales, especially of big-ticket items and luxury goods. Auto dealers said sales have declined in the past few weeks. The drop was attributed to both supply and demand factors. Some dealers reported that the availability of new models has not met their needs. Other dealers said a reduction in manufacturers' incentives and a lack of consumer interest in some new model offerings have damped demand this fall compared to the summer. Despite the slower pace of sales, dealers generally indicated that their inventories were not excessive. Finance Most of the Third District bankers surveyed in mid-October said loan volumes outstanding at their institutions have been steady in recent weeks. A few noted some slight increases in business borrowing. Several bankers said that large companies have approached banks for credit in lieu of public offerings of debt or equity. Applications for bank credit for commercial real estate projects were also said to have increased, but bankers said willingness to provide financing for this sector has declined in both public markets and among depository institutions. Demand for credit among middle-market firms was described as steady. Consumer loan volumes outstanding were generally described as steady in the region. Some banks noted heavy residential mortgage refinancing activity, but there have been only minimal increases in the value of mortgage loans outstanding at the institutions contacted for this report. Bankers expect loan demand to ease in the months immediately ahead. They forecast a decline in demand for commercial and industrial credit as a result of an overall slowing in business expansion in the region which they anticipate for next year. Demand for consumer credit is expected to pick up seasonally at year-end but is not expected to be strong in 1999. Return to top New York Cleveland