April 24, 2002 Federal Reserve Districts Third District - Philadelphia

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Business activity in the Third District was on the rise in April. Manufacturers reported increases in shipments and orders, and slightly more firms were posting gains in new orders in April than in March. Retail sales of general merchandise have been rising modestly, and stores' year-over-year increases appeared to be accelerating somewhat. Auto sales have been steady. Bank loan volumes have been moving up slowly, mainly because of some growth in business lending. Employment in the region has been on the decline, but the downward trend appears to be moderating. Employment continued to fall in manufacturing and trade and has been virtually flat among financial and insurance companies. Employment has begun to rebound in the lodging industry, and there have been some gains in employment in business services except among computer service firms, which have been reducing employment. Looking ahead, Third District businesses contacted in April expect modest growth in the region during the rest of the year. Manufacturers forecast increases in shipments and orders. Retailers expect the growth rate of sales to accelerate as the spring selling season gets under way. Auto dealers anticipate steady sales at around the current rate. Bankers generally forecast slow growth in overall lending, with relatively stronger increases in commercial and industrial loans and slight gains in consumer lending but a decline in real estate lending. Companies in all industries intend to add equipment and expand facilities as their business improves, but most of the area firms reporting on their investment plans indicated they would not be making major software purchases this year. Business firms in the region indicate that, on balance, their capital spending this year will be even with or slightly above last year's levels. Manufacturing Third District manufacturers reported continuing modest gains in activity in early April. Increases in orders and shipments were slightly more widespread among area manufacturers than they were in March. Business conditions were relatively stronger for furniture makers, building materials producers, and metal products manufacturers. Several apparel makers noted significant improvement after a slow first quarter. In contrast, producers of industrial machinery, electrical equipment, and chemicals indicated their business was flat or rising only weakly. On balance, industrial firms continued to reduce inventories, although half of those contacted for this report said they were maintaining steady inventories. More than three out of four manufacturers in the region indicated that prices for both inputs and the goods they manufacture were steady in February. The region's manufacturers have positive forecasts. Over half of the firms surveyed in April expect increases in orders and shipments during the next six months, while around one in 10 anticipate decreases. On balance, area manufacturing firms have raised capital spending plans, but increases are modest and spotty across the major industrial sectors in the region. Several chemical and plastics companies have scheduled increases in outlays. Capital spending in other manufacturing sectors is likely to be flat or up just slightly. Retail Third District retailers generally reported moderately rising sales in early April. Sales were up compared to last month and to April of last year. Most of the store executives contacted for this report said the rate of increase had picked up slightly in recent weeks. Sales of home furnishing continued to be brisk. Apparel sales have strengthened after being slow during the winter months, but some merchants said sales of spring clothing were slightly below their plans. Most area retailers said their inventories were at appropriate levels, but some indicated that they had lower than desired stocks of some popular items. Store executives expect the sales rate to accelerate as the spring selling season takes hold. In particular they look for improvement in apparel sales as consumers shop for warm weather clothes. They also expect sales of summer-related sporting goods and lawn and garden equipment to be good. Auto dealers said sales have been steady recently at a healthy pace. They expect the current sales rate to continue through the rest of the year, supported by ongoing manufacturers' incentives. Finance Outstanding loan volume at Third District banks has edged up in recent weeks. Banks have had modest growth in business loans. Business borrowing has moved up across a wide variety of industries, although the total increase has been slight. Consumer credit has been flat. Most of the banks in the region indicated that mortgage refinancing activity has been easing, but several noted increases in purchase mortgages. Most of the bankers contacted for this report indicated they continued to limit their commercial real estate lending activity, although some said they were still making loans to well-capitalized builders. Bankers in the Third District expect overall lending to continue to grow slowly this year. Several noted that their business customers are seeing increased demand, which should result in some increased financing needs, but bankers do not anticipate a large overall extension of credit to business borrowers for major expansion of facilities. Bankers expect consumer lending to increase slowly, but they anticipate a slowdown in residential real estate lending. Capital Spending Most of the business firms in the region that were queried on their capital spending plans indicated that such expenditures this year will be around the same as last year or slightly higher. However, some firms expect to make significantly larger capital outlays this year compared with last year. These firms were in a variety of industries, and it appeared that they were responding to increased demand for their particular products rather than an increase in overall demand within their industries. Although area firms are not planning large increases in capital spending in total, the capital spending that they will make includes a broad range of business equipment as well as new buildings. Manufacturing companies indicated they would be expanding capacity by adding production equipment. Service companies said they would be updating office equipment. Several large retail companies said they would be building new stores, but they were only planning the same number of new stores this year as last. Firms in most industries indicated that they were unlikely to make large purchases of computer software this year. Return to top New York Cleveland