March 15, 1988
The Third District economy in early March was making only modest progress. Manufacturing activity was advancing marginally and retail sales were level with, or slightly above, the pace of the year-ago period. Auto sales are considerably higher than they were in early 1987, although the increase is less than dealers had expected. Banks report very little growth in consumer loans, but note an improvement in commercial lending; real estate lending remains strong. Commercial real estate markets are softening in some suburban areas but are otherwise healthy. Residential real estate activity is picking up slightly and builders report a good sales rate at new projects.
Expectations in the Third District business community are mixed, but the overall outlook is for a continuation of current trends. Retailers expect the pace of sales to accelerate modestly from spring through fall, achieving an annual increase between 3 and 10 percent. Auto dealers believe cars will sell at about the current rate for the rest of the year. Bankers expect continued strength in real estate lending and look for a modest increase in business loan demand, but they expect consumer lending to remain flat. Real estate agents say home sales will run at a good pace this year if mortgage rates do not rise above current levels, and builders expect new home sales this year to match last year's rate, although they are not optimistic that housing demand will carry strongly into 1989. Manufacturers have the most negative forecast: in February, surveyed manufacturers turned pessimistic, on balance, for the first time in nearly eight years, and they have held to this view in March. Local industrial firms expect slower business in the next six months, and they may reduce employment accordingly.
Manufacturing
Industrial activity in the region is moving up marginally, according
to preliminary results of the March Business Outlook Survey. Twenty
percent of the manufacturers covered by the survey are stepping up
operations, 70 percent are running at a steady pace, and 10 percent
are cutting back. Nondurables manufacturers report relatively more
improvement than durable goods producers.
Specific measures of industrial activity are mixed. In March, new orders increased marginally, but shipments increased at a faster pace; consequently, order backlogs fell slightly. However, the pickup in shipments allowed manufacturers to work down inventories somewhat this month. Manufacturing employment continues to grow: more firms reported adding workers than cutting back in March, marking eleven consecutive months of rising payrolls.
With regard to prices, half of the March survey respondents report rising input costs and half say they are steady; for their own goods, 25 percent are charging more while 70 percent are maintaining steady prices.
The outlook among Third District manufacturers turned pessimistic in February and remained so in March. For the first time in nearly eight years anticipation of slower business is more widespread among surveyed companies than expectations of improvement. Survey respondents also forecast a level rate of new orders and shipments, a further decline in order backlogs, and a weaker employment situation in the next six months.
Retail
Third District retail sales an early March were running level with
or slightly above last year's pace, roughly according to merchants'
plans. Store officials said their inventories were in line with
sales. Some reported taking delivery of spring merchandise earlier
than usual to get discounts offered by suppliers; none reported
undesired buildup of stocks.
Merchants are cautiously optimistic for the year ahead; they expect the pace of sales to be mild in the spring and move up through fall, with sales for the year as a whole 3-10 percent above 1987. Plans to add or remodel stores are being considered by many area retailers.
Auto dealers said sales in January and February ran above sales in the same months in 1987. Dealers said the year-to-year improvement is more than just a rebound from the particularly low sales of the prior year period and reflects healthy demand for new cars. Although they have scaled back the 1988 sales estimates they made last year, they are optimistic that the current rate of sales can be maintained for the balance of the year, even without manufacturers' incentives.
Finance
Total loan growth at major Third District banks picked up in
February after a pause in January. Lending officers say business
loan demand has rebounded recently and they are receiving more
inquiries from business borrowers. Consumer lending is growing
weakly. Bankers say credit card lending is flat while other types of
personal installment lending are advancing fractionally. Several
banks have been promoting personal auto leasing recently, and these
efforts have boosted this form of consumer finance. Real estate
lending continues to grow at a strong pace.
Bankers expect current lending trends to continue. They foresee some further growth in commercial and industrial lending, but expect consumer lending to remain flat. Real estate lenders expect real estate loan volume to be strong for the rest of the year.
Real Estate and Construction
Real estate agents described most markets as healthy in early March,
with commercial leasing generally steady and residential sales
picking up. Commercial real estate markets in the Third District are
active although some pockets of softness are beginning to appear.
Commercial real estate agents say office supply and demand in the
central business district of Philadelphia are roughly in balance; in
suburban locations the picture is mixed. Vacancy rates are rising in
areas where construction has been extensive and falling in areas
where the pace of building has been slower. Lease concessions are
now common in relatively overbuilt areas, and developers in these
areas have postponed starting dates for new projects.
Demand for industrial buildings is strong through most of the Third District. As major highway projects in the region near completion, companies from outside the district are locating new warehousing and distribution centers to take advantage of improved transportation links.
Residential real estate markets in the Third District are generally healthy. Sales activity slackened in January, but real estate agents contacted at the end of February said home sales were increasing by what appeared to be more than a seasonal amount. Some agents said houses in the higher price ranges were not selling as quickly as lower priced houses; and their forecast calls for average selling prices to rise, but not by as much as they did last year. Nevertheless, real estate agents believe the residential market will remain healthy, barring any upward thrust in mortgage rates.
Residential builders contacted in early March generally report new house sales running at a good pace, and some are unable to complete houses as quickly as buyers would like. Overall, developers in the Third District expect sales in 1988 to be around last year's level; however, they are not as optimistic for 1989, and some large companies are trimming their long-range development plans.