December 8, 1999 Federal Reserve Districts Third District - Philadelphia

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Business activity in the Third District moved up, on balance, in November, although in some sectors of the regional economy growth has slowed. Manufacturers posted gains in shipments and new orders. Retail sales remained on an upward trend, and most stores reported solid year-over-year gains for the Thanksgiving weekend. Auto sales were steady during November. Bank lending has been flat as increases in consumer credit have been offset by decreases in real estate lending and business loan volume has been level. Residential and nonresidential construction have been easing recently, but real estate agents indicated that sales of existing homes have been steady. Employment continued to grow in the region, and firms in nearly all industries have reported difficulty in meeting their needs for workers. Staffing of stores for the Christmas shopping period was described as especially problematic. Looking ahead, business contacts in the District have mixed views, although some step-up in activity is expected overall. Manufacturers forecast increases in shipments and orders. Retailers expect sales for the holiday shopping period to exceed last year's level, and auto dealers anticipate an upturn in car and truck sales after the turn of the year. Bankers expect lending to strengthen next year as well. Construction activity may slip further, according to builders, especially for commercial office buildings, but public construction is expected to remain strong. Manufacturing Manufacturing activity in the Third District continued on an upward trend in November. On balance, industrial firms reported increases in shipments and orders during the month. Gains were common among nearly all the major goods-producing sectors in the region. Producers of construction materials indicated that spending for transportation infrastructure throughout the nation was prompting demand for their products, but some equipment makers reported drops in sales as a result of declining activity in the aerospace industry. Order backlogs at plants in the region have been steady, overall. Manufacturers' inventories of raw materials and supplies rose slightly in November. A few firms indicated they had ordered increased quantities of critical inputs to ensure continued operation in the event of supply interruptions related to possible Y2K problems. Besides the firms that have already added to inventories, other firms indicated that they plan to boost inventories closer to the end of the year. For firms that have already added to inventories and those that plan to, the increased amounts represent around one week's supply of those inputs. Third District manufacturers generally expect growth to continue at about its current pace during the next six months. Although some firms forecast increases in their order backlogs, most expect to be able to meet rising demand for their products without delays in filling orders. Expectations of price increases persist. Nearly half of the firms surveyed in November anticipate paying higher prices for inputs in the next six months, and one-fourth plan to raise prices for the products they make. Retail Third District merchants reported continued sales growth in November, although some stores had lower year-over-year gains for the month than they had in October. Store executives said warmer than usual weather in November damped sales of outerwear. Some stores were making early price reductions to boost sales, but most stores were maintaining their planned promotion schedules. Inventories were generally described as in line with plans, although some retailers said their supplies of merchandise were a bit below desired levels. Sales picked up over the Thanksgiving weekend, and merchants generally indicated they were on track to post year-over-year increases of around 5 percent, in current dollars, for the holidays. Toys, recorded music, jewelry, and apparel other than winter coats were the best-selling items as the Christmas shopping period began. Auto dealers said sales have slowed recently but remain well above last year's pace. The slowdown is seasonal, according to the dealers; they expect a pickup after the year-end holidays. Inventories were said to be in line with sales, overall, but manufacturers have boosted rebates to step up sales of leftover 1999 models. Finance Loan volume outstanding at Third District banks remained level during November, according to reports from commercial bank lending officers. Some banks posted modest increases in consumer lending, mainly home equity and auto loans, but residential real estate lending eased generally at area banks. Commercial and industrial loan volume has been virtually flat, on balance, at banks in the region. Several bank lending officers said they believe many business borrowers arranged bank financing earlier than usual this year in order to avoid any delays that might occur if Y2K problems materialize. Bankers expect loan demand to pick up in January, but they do not forecast a strong increase. Real Estate and Construction Commercial real estate markets remain firm in the District, although construction activity has eased. Real estate contacts reported a slight drop in commercial office vacancy rates in the region; they estimate the current rate for the Philadelphia metropolitan area at 10 percent for Class A buildings, about 2 percentage points below the year-ago rate. Rental rates have risen since the beginning of the year, but appeared to be leveling off. Commercial real estate brokers said sales and leasing activity has been strong. Construction of office buildings has slowed, and a further decline is expected in the year ahead. According to commercial brokers, recent increases in new space and renting of subleased space have brought supply and demand into balance. Public construction of buildings and roads continues at a high rate, and some real estate contacts said construction of industrial buildings was on the increase. Residential real estate agents generally indicated that the pace of existing home sales was steady in November and above the rate set in November last year. Sales of new homes appeared to have eased. Builders continued to report that labor shortages were causing delays in construction even at the slower sales rate. Price increases, for both new and existing homes were slowing, according to realtors and builders. 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