January 20, 1999 Federal Reserve Districts Third District - Philadelphia

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Economic activity in the Third District was moving up as the new year began. On balance, manufacturers reported a slight improvement in business conditions, although weak Asian markets continued to hamper recovery for some industrial sectors. Retail sales for the holiday shopping period met or came close to meeting most retailers' goals, and auto sales remained strong. Bankers generally indicated that lending to both consumers and businesses was increasing and that mortgage activity was still robust. The outlook in the District is positive. Manufacturers expect orders to increase during the first half of the year, and they plan to step up capital spending. Most retail executives and auto dealers believe firm consumer confidence will support a continued high level of sales. Bankers expect further economic growth in the region this year; however, they believe the pace of expansion will ease somewhat compared to last year's. Manufacturing Manufacturers contacted in late December and early January noted some signs of improvement. Although most said business was steady, slightly more had recent increases in orders than decreases. In particular, manufacturers of metal products and textiles noted stepped-up demand. In contrast, chemical producers and equipment manufacturers reported continuing slowness, attributable in large part to persistent weakness in Asian economies. Despite the upturn in demand, order backlogs have remained unchanged. Area manufacturers have maintained steady employment. The regions' manufacturers predict further improvement in the first half of the year. Nearly half of the firms contacted for this report expect orders and shipments to increase, twice the number that anticipate slower business. Capital spending is also forecast to grow, and increases in working hours are scheduled for the first and second quarters. Despite current downward pressure on industrial prices, the consensus among industrial managers surveyed at year-end is that prices will rise in 1999. Retail Sales for the Christmas shopping season met or came close to meeting most retailers' expectations of a 4 to 5 percent increase, in current dollars, over the 1997 period. Electronic items sold well, and the onset of cold weather in late December boosted sales of winter coats and other seasonal apparel, which had been languishing. Discount stores generally reported better sales increases than other types of stores, although the late surge in apparel sales helped some department stores come close to achieving their sales targets. Promotional price reductions appeared to be a bit more extensive this season than in the previous year, but inventories after the holidays did not appear to be significantly above planned levels. Auto dealers reported a good pace of sales in December, above the rate in December 1997. Pickup trucks, sport utility vehicles, and minivans continued to sell strongly, and some dealers indicated that supplies of these vehicles have not kept up with demand. Dealers said the level of manufacturers' incentives remains high and low financing rates were common. Both auto dealers and general retailers said consumer confidence seems high, and they expect consumer spending to stay strong. Some retail and banking contacts expressed concern that consumer debt might be approaching levels that would tend to curtail spending, but they did not foresee serious retrenchment as long as employers' demand for workers remains healthy and interest rates do not rise. Finance Bankers reported growth in both personal and business lending in December. Consumer credit expanded for seasonal shopping as well as auto purchases and for spending on home improvements. Some bankers reported that they were implementing more stringent credit conditions for personal loans, but they do not expect the tighter standards to limit loan growth significantly. Mortgage activity remained strong for both refinancing and purchases. Some bankers noted especially large increases in applications for mortgages for newly built homes. Commercial and industrial loan demand has picked up, according to several bankers contacted in early January, although competition among banks and other lenders remained keen. Some commercial bank lending officers said companies seeking new or enlarged credit facilities were generally very well capitalized and were looking to establish financing arrangements in anticipation of expanding business this year. Overall, however, bankers indicated they and their business borrowers were expecting slower economic growth this year compared to last year. Return to top New York Cleveland