July 27, 2005 Federal Reserve Districts Third District--Philadelphia

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Economic activity in the Third District was expanding in early July. Manufacturers reported increases in orders and shipments compared with June. Retail sales of general merchandise increased compared to the prior month and year. Auto sales remained on the rise following a strong upturn from May to June. Banks reported that lending continued on an upward trend, with gains in business lending and home equity credit. Firms in the District's major service industries reported growth in activity in the past few months about in line with the growth rates they posted earlier in the year. Third District business contacts generally expect business activity in the region to continue to expand at around the current pace. Manufacturers expect increases in shipments and orders during the next six months, although the balance of positive forecasts is not as great as it was during the first half of the year. Retailers anticipate steady sales growth, with moderate year-over-year gains. However, auto dealers are uncertain about the outlook, and some expect the sales rate to decline in the months ahead. Bankers expect continued loan growth near the recent pace. Service sector firms expect moderate, steady increases in business. Manufacturing Manufacturing activity in the Third District was on the rise in early July according to manufacturing firms contacted during the month. Nearly one-third of the companies contacted posted increases in new orders and shipments compared with June, and around one-fifth had decreases. However, order backlogs were on the decline, and delivery times were unchanged from the prior month, on balance. For early July compared with June, the improvement in business was relatively stronger among firms producing wood products, packaging, and industrial materials. Manufacturers of metals and metal products generally had declines. Makers of other products gave mixed reports. On balance, the region's manufacturers expect continued growth in business activity, although positive expectations are not as widespread as they were in the first half of the year. About half of the firms contacted in July expect their shipments and orders to increase during the next six months, and about one-fourth expect decreases. On balance, capital spending plans remain positive among District manufacturers, but the number of firms scheduling increased outlays is somewhat lower than it was during the first half of the year. Reports of price increases from Third District manufacturers outnumbered reports of decreases in early July, although a majority of manufacturing firms reported steady prices for the month. One-third of the manufacturing firms contacted for this report noted increases in input prices from June to early July, and one-fifth raised output prices. Less than one-tenth reported declines in either input or output prices. The number of firms noting increases for the month was about the same as during the second quarter, and lower than in the first quarter. During the next six months about half of the manufacturers contacted for this report expect increases in input prices, and almost one-third plan to increase the prices of their own goods; only a very small percentage expect declines in either input or output prices. Retail Retailers generally reported higher sales in early July compared with June and with July of last year. There were gains among most lines of goods, with somewhat better performance for seasonal items, apparel, and home furnishings relative to other merchandise categories. Some merchants noted that shoppers were visiting stores less frequently, consolidating shopping trips in order to economize on gasoline expense. Some store officials also noted an apparent decline in impulse buying by shoppers. Retailers expect sales growth to continue at about the current pace, but they are being cautious in their expansion plans. Several retail executives indicated that rising operating costs were leading them to focus on measures to increase sales at existing stores rather than on opening new stores. Auto dealers in the region generally reported a pickup in sales in June and early July stemming from new price discounts by manufacturers. As a result, inventories have been reduced to more desirable levels. However, dealers indicated that sales of large sport utility vehicles have been declining, and they attribute the sales falloff to high gasoline prices. Dealers expressed some concern that the pace of sales will ease later this year as the impact of recent price cuts wanes. Finance The volume of loans outstanding at Third District banks rose in the first weeks of July compared with June, according to banks surveyed for this report. Commercial and industrial loans have been increasing. Some bankers indicated that there has been strong growth in lending to construction firms and to manufacturers and other companies with housing-related business. Lending for residential mortgages, home equity loans, and home equity credit lines has been growing, as has credit card lending. Bankers in the District expect continued expansion in business activity in the region, and they expect overall lending to remain on the rise. Investment companies reported gains in cash inflows in recent weeks, with about equal growth in purchases of money market, bond, and equity funds. Investment company officials said investor confidence appears to be improving, although both individual and institutional investors continue to believe there remains some risk that financial conditions could deteriorate and economic growth could falter. Services Most of the Third District service firms contacted in early July reported growth in activity. Information services firms have had some increases in demand, and they have been upgrading their own systems. Among other business services, there has been an increase in activity among basic business support services firms and at temporary employment agencies. Demand for temporary workers has picked up for health care, administrative, and some skilled manufacturing occupations. Some temporary employment agencies also noted more demand for workers this year compared with last year from firms with summer peak activity. Most of the service sector firms contacted for this report expect business to continue to advance at around its current growth rate during the balance of the year. Return to top New York Cleveland