Beige Book Report: Philadelphia
June 23, 1987
Moderate growth characterizes most sectors of the Third District economy as the summer begins. Manufacturing activity is expanding slightly in June, for the third month in a row; and, in a change from recent months, durable goods manufacturers are making greater gains than nondurable goods producers. Retailers report that May sales ran ahead of plans and that strong consumer demand is continuing into June. Automobile sales, however, are weak. Bankers note that real estate lending remains strong and that commercial and industrial lending picked up in May and June. Consumer loan demand, however, is growing at the same slow pace that has marked recent months.
The outlook in the Third District business community is generally optimistic. A slight majority of the manufacturers polled in June expect further expansion in the next two quarters. Area merchants are encouraged by the pace of sales this spring and they forecast a good summer. They also express confidence that sales will remain healthy for the rest of the year. In contrast, automobile dealers do not expect any improvement this year. Bankers expect business lending to grow modestly, but they do not foresee an acceleration in consumer loan demand. Although bankers say pressure on net interest margins has eased somewhat recently, slow growth in deposits has prompted concern about the cost and availability of funds later in the year.
Manufacturing Industrial activity is up slightly this month, according to the most recent Business Outlook Survey. Nearly one-third of the companies covered by the June survey report increased business, while one- fifth say their business is off from May; about half are operating at a steady pace. Business is improving for durable goods producers, but is mostly stable for makers of nondurables. Although the difference is slight, it marks a reversal of the sectoral pattern observed in earlier months this year.
Most indicators of manufacturing activity in June reflect the trend of moderate growth experienced so far this year. Shipments by local manufacturers are rising and new orders are up, but not by a comparable amount. Consequently, order backlogs are slipping. Employment is steady, with most firms reporting no changes in either payrolls or working hours.
Industrial prices in the region are generally stable, although there is some upward movement in input costs. While most of the companies surveyed in June indicate steady prices for the goods they purchase, 40 percent reported higher charges compared to May. Most firms say they are holding the line of the prices of their own products.
Looking ahead, just over half of the survey respondents foresee continued growth this year. Overall, area manufacturers expect further gains in orders and shipments, and they expect declining order backlogs to stabilize. On balance, their capital spending plans call for higher outlays during the next six months. Nonetheless, employment is expected to decline slightly over the next two quarters.
Retail
Nearly all area retailers contacted in early June reported strong
sales in May continuing into June. Sales at all types of stores are
running ahead of last year, with increases ranging from 5 to 10
percent. Department store officials say quality apparel and upscale
merchandise generally are their best performing product lines. They
are emphasizing these goods in their product mix because of their
relatively greater selling margins.
The strength of consumer demand this spring, following good first quarter results, is leading store officials to raise sales forecasts for the summer. Most merchants expect sales: for this period to run nearly 10 percent above last summer, and they expect similar results for 1987 as a whole. However, some discount store executives are concerned that stepped-up promotions and price markdowns may become common later in the year as individual competitors attempt to maintain and enlarge their market shares.
Automobile sales in the Third District are running parallel with national trends. Unit sales vary from up slightly to down substantially at domestic franchises, and inventories exceed desired levels for nearly all makes. Nevertheless, dealers selling U.S. - made cars have not discounted prices yet, and this, combined with lower operating expenses, is limiting the current impact of slower sales on their profits. However, import dealers' profits are declining as gross sales fall. Dealers expect the pace of sales to slip a bit further before stabilizing for the balance of the year.
Finance
Loan growth at major Third District banks picked up somewhat in May
after slowing in April. Total outstanding loan volume in late May
was approximately 3 percent above year-end 1986, and 10 percent
above last May. Most of the growth is attributable to real estate
and commercial lending. Real estate lending has been strong for the
past 12 months, and bankers say that active real estate markets and
profitable land development projects in the region continue to
provide opportunities to make sound loans.
Commercial and industrial loan growth increased in May. Bankers say that their marketing efforts are bringing in good loans from local businesses. They are putting relatively more floating-rate loans on the books, and they say that net interest margins, which had contracted recently, are now improving.
Some area banks are promoting consumer loans aggressively, and they report gaining substantial amounts of new business. Overall, however, the lower growth rate in consumer lending that local banks first noted last fall is continuing. Lending officers contacted in June said that credit card lending is flat and other installment lending is up only slightly. The rapid growth in home equity lending that followed the introduction of this product appears to have eased also.
Nearly all bankers say deposit growth has not met expectations. This is especially the case with long-term (one year or more) certificates of deposit. Bankers believe higher rates on alternatives to bank accounts have led to disintermediation in recent months. Several mentioned the possibility of declining liquidity in the banking system toward the end of the year. Anticipating this, asset/liability managers are attempting to lengthen the maturities of their liabilities, and some banks have introduced floating-rate CDs or raised rates to attract longer-term money.