January 16, 2002 Federal Reserve Districts Third District - Philadelphia

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Business conditions in the Third District remained slow in December, but there were a few positive signs. Manufacturers reported continuing declines in shipments and orders, but the rate of decline appeared to be easing. Sales of general merchandise at area stores for the Christmas shopping period increased a few percent over the prior year, slightly exceeding pessimistic forecasts. Auto sales fell in December compared to November but seemed to be holding steady in early January. Bank loan volumes increased in December in the major credit categories: business, consumer, and real estate. The outlook in the Third District business community is cautious. Manufacturers predict an upturn by the middle of the year, and they have slightly raised capital spending plans for the first half of the year. Retailers are not certain that sales will continue moving up in the next few months, and they have generally modest sales targets for the first half of the year. Auto dealers anticipate nearly steady sales for most of this year at a slower rate than last year. Bank credit officers see some signs of modestly increasing demand for commercial and industrial loans, but they say the outlook for consumer lending is unclear and real estate lending could ease. Manufacturing Manufacturing activity in the Third District remained on a downward trend in December, but there were some indications that the rate of decline was easing. Compared with November, fewer firms reported decreases in orders and shipments, although business was weak in nearly all the major manufacturing sectors in the region. Firms producing metals and metal products continue to report that their customers are shifting to foreign suppliers. Firms producing electrical and electronic equipment indicated that continuing weakness in the telecommunications industry has been holding down demand for their products. A majority of the region's manufacturers maintained steady working hours in December, but around one-fourth made cuts, and only a few firms expanded hours. Area firms continued to reduce inventories, on balance. Local manufacturers look for recovery to get under way by midyear. Just over half of the firms surveyed in December forecast increases in orders and shipments over the next six months. They also expect some firming in industrial prices. On balance, firms in the region have slightly increased their capital spending plans for the first two quarters of the year. Retail On balance, Third District retailers reported slightly higher sales for the recent Christmas shopping period compared to a year ago. Increases in sales in the last week of December and the first week of January provided many area retailers with the boost they needed to achieve year-over-year gains of around 2 percent, on average. Price reductions to stimulate sales were described as very deep by store executives, who expect low profits for the season. Retailers indicated that apparel sales were weak, especially for men's wear. Sales of outerwear were also quite slow, hampered by unseasonably mild weather during most of December. Sales of consumer electronics, jewelry, and home furnishings were better than most retailers had expected. Cautious purchasing by stores prior to the holidays and aggressive discounting afterwards has generally left area retailers with acceptable inventory levels. Nevertheless, stores in the region are unlikely to significantly increase buying of spring merchandise. Most retailers have very modest sales targets for the first half of this year. They see no evidence that consumers will move to a higher pace of spending soon. Some even expect consumers to look for ways to economize further, at least for the next quarter or two, until general economic conditions improve. Auto sales in the region fell in December from November, but sales in early January appeared to be steady at the December pace. Inventories were generally described as low. Dealers expect sales to fall as manufacturers' incentive-financing programs are scaled back, but they do not anticipate a continuing decline in demand. Rather, most of those contacted for this report anticipate a generally steady sales rate this year, albeit below last year's overall rate. Finance Lending at major Third District banks increased moderately in December. Outstanding loan volume has increased in all major credit categories--commercial, consumer, and real estate. Much of the increase in consumer lending was said to be seasonal. In contrast, the slight increase in business lending was seen as a potential trend by bank lending officers, who said low interest rates and anticipation of improving economic conditions have prompted some business borrowers to proceed with expansion plans. Concern about business credit quality persists, however, and several of the bankers contacted for this report said they are more strictly enforcing credit policies than they had been. Nevertheless, most banks in the region are still actively seeking to increase their commercial loans. Bankers in the Third District expect business loan demand to move up, but not strongly. Overall gains in commercial and industrial loans will be limited by bankers' concern about extending credit to industries currently or potentially experiencing relatively weak conditions, such as travel, food service, health care, and construction. Bank lending officers are uncertain of the course of consumer and real estate lending, although many anticipate some easing in the growth of real estate loans after last year's large increase. Return to top New York Cleveland