Beige Book Report: Philadelphia
December 1, 1987
The Third District economy was showing signs of moderate expansion in the first half of November. Manufacturing activity was up for the eighth month in a row and factory employment increased for the fifth consecutive month. Retailers reported sales running above last year's pace in October and the first two weeks of November, although the year-to-year increase fell below their expectations. Auto dealers say sales have slipped in the last two months, following a good third quarter. Bankers note slowing growth in business and consumer lending, but say real estate lending, primarily for residential construction, is still strong.
While contacts in the region's business community express concern about the effects of the October stock market drop, they have not altered their expectations significantly. Manufacturers say the outlook is more uncertain than it was before the drop. Nevertheless, they anticipate continued growth, although possibly at a slower pace than in recent months. Area retailers generally agree with the industry consensus that sales in this year's last fiscal quarter will be around 4 percent above the same period last year. They say that if a broad slowdown does develop, they would not expect to see it dampen sales until the spring of 1988. Auto dealers expect to maintain their current rate of sales through the end of the year. Bankers note that growth in business and personal lending has been slowing for several months, and they expect this trend to continue; they do not foresee a sharp drop in loan demand in these categories resulting from recent volatility in the financial markets. Lending officers say demand for real estate loans will remain strong, but that lending for development is growing riskier.
Manufacturing
The region's industrial sector posted its eighth consecutive month
of expansion in November, according to the Business Outlook Survey.
Local manufacturers' overall assessment of current economic
conditions indicates continuing moderate growth. Measures of new
orders, shipments, and employment moved up in November, while order
backlogs were unchanged. Manufacturers of nondurable goods are
making gains, on balance, while producers of durable goods are
operating at a steady pace.
Industrial prices, both paid and received, are stable for a majority of respondents. Some upward pressure is apparent, however, as it has been for the past few months: from October to November, input costs rose at about 40 percent of the plants polled, and prices for goods sold were up at about 20 percent of the plants.
The stock market's sharp decline in October appears to have prompted some concern for the future among survey respondents. While positive views still edge out pessimistic expectations in the November survey, the overall level of optimism is off from recent months. Also, several survey participants say the uneasiness of the financial markets in late October has increased the uncertainty of their own short-term forecasts of business conditions. Nevertheless, on balance, managers at area firms are planning to go ahead with capital spending plans; 61 percent of the companies polled in November plan to continue current levels of capital spending, and 25 percent plan higher outlays for plant and equipment over the next six months.
Retail
Third District retailers contacted in mid-November described sales
as running somewhat below plan, but "comfortably above" the rate at
this time last year. Stores in the Third District generally have not
resorted to unplanned discounting, and results of scheduled
promotions have met or exceeded expectations. Most product lines are
selling satisfactorily, but some weakness has developed in womens'
apparel. Merchants say this may be due to rising prices for imported
clothing.
Store executives are cautious in their forecasts of Christmas sales, although regional department stores that have mailed Christmas catalogs to customers say the response so far has been good. Retailers say the industry consensus is that sales will be up about 4 percent from last year, in dollar terms, and they have built up stocks for the holiday season consistent with this estimate. Thus, inventory buildup was moderate even before the stock market decline in October prompted concern about consumer spending.
Auto dealers say their third quarter sales were above those of the same period a year ago, but that sales declined during September and have been running at a slower rate since then. They say manufacturers' incentives for over-stocked models will probably be introduced by all domestic companies by the end of the year.
Finance
Total loan volume outstanding at major Third District banks in
October was 7 percent higher than in October 1986. Real estate
lending has been on a strong upswing since the year began, but
growth in other loan categories has been slackening since June.
Bankers contacted in mid-November said these trends are continuing.
Several described commercial and industrial loan volume as "flat"
over the past two months. Lending officers said growth in consumer
credit has been slowing regularly for months; none observed sharp or
unanticipated declines following the October stock market drop.
Commercial bankers expect business and consumer lending to grow slowly in the months ahead. Lending officers say there is no indication of resurgent growth in business loan demand despite signs of a pickup in manufacturing activity, and most believe consumer credit card lending will continue to grow slowly while other personal loan categories will remain virtually flat. The October turmoil in financial markets is not expected to put any additional drag on lending.
Bankers expect real estate lending to remain strong. They say the region's residential real estate markets are still healthy. However, financing reeds of developers—for land acquisition, site development, and model home construction are rising as demand for more expensive homes increases. As a result, builders' borrowing needs are growing in relation to their capital. Bankers say up-front lending to developers is therefore becoming more risky, and that some banks may begin to limit their exposure in construction lending.