January 25, 1989
The Third District economy continues to expand as 1989 begins but there are indications that the pace of the advance may be slackening. Manufacturers polled for the January Business Outlook Survey report moderate improvement again this month, marking a full year of expansion according to the survey. Most retailers report meeting their Christmas sales goals of modest real growth from the previous year. Bankers indicate that loan growth was good as 1988 closed, with business, personal, and real estate lending all on the rise. Realtors describe the commercial real estate market as healthy but note a decline in residential sales since the summer.
While current conditions indicate continuing growth in most sectors of the Third District economy, slower progress may be ahead. Manufacturers expect activity to ease from its current pace during the first half of the year. Retailers are generally cautious in their sales planning for the new year and most are keeping inventories under tight control. Bankers note a falloff in business loan and mortgage applications in recent weeks, and they expect slower growth in all types of lending this year compared to last. Realtors expect commercial leasing activity in 1989 to run at around the same rate as in 1988. Although they are looking for a pickup in residential sales by spring, they say the prospect is uncertain.
Manufacturing
Local manufacturers are starting 1989 on a positive note, according
to the January Business Outlook Survey, although they believe
business might dip later in the year. Among firms participating in
the survey, 36 percent report business is moving up while only 8
percent say it is slowing. In both the durable and nondurable goods
sectors most measures of industrial activity reflect moderate
expansion. New orders, shipments, and order backlogs were rising in
January, and inventories were edging down. On balance, survey
participants were increasing working hours and adding marginally to
payrolls.
Industrial prices in the region remain on an upward trend. Sixty-one percent of the January survey participants said they were paying more for inputs compared to December and 38 percent were raising the prices of their own products.
In contrast to current reports of generally healthy business conditions, local manufacturers predict some decline in activity by midyear. Looking out six months, 27 percent of the January survey participants expect the pace of business to slow while only 18 percent expect further improvement. On balance, survey respondents foresee the rate of orders holding steady during the first half of the year while shipments rise slightly, leading to a decline in order backlogs as manufacturing activity slows. Despite this forecast, survey respondents are planning to add workers and boost capital spending between now and summer.
Retail
Third District merchants generally reported meeting sales goals for
the Christmas season, helped by stronger than usual sales in the
week after Christmas. Department stores in the region averaged
around 6 percent year-over-year gains, in current dollar terms.
Discount stores did somewhat better. Specialty store results were
mixed: some posted strong increases white others only matched or
fell below their 1987 performance. Most store officials said their
inventories were lean as Christmas approached, and they did not make
significant unplanned price reductions.
Most merchants contacted in early January described their sales plans for 1989 as very cautious. Their impression of consumer confidence is that it is high but fragile; and many retailers believe that sales could drop off sharply in the wake of any negative economic news.
Third District auto sales in early January were up from the same period last year for domestic makes, but off for imports. Dealers say demand for most U.S. models is running above expectations although a few are not proving popular and incentives are being offered to reduce inventories of these cars. Area dealers say total unit sales in 1988 were around 3 percent higher than in 1987, in contrast with forecasts of a slow year. Few dealers expect growth to continue in 1989, but most think sales will not fall substantially below the 1988 level.
Finance
Loan volume at major Third District banks in December was
approximately 13 percent above the December 1987 level, reflecting a
year-over-year growth rate that has been steady since mid-1988.
Bankers contacted in January said the volume of commercial and
industrial loans being booked was moving up strongly, but inquiries
and applications from potential borrowers were dropping off.
Consumer credit lending was increasing at a pace that bankers
described as healthy but not exceptionally strong after accounting
for seasonal variation. Real estate lending continues on a trend of
strong but slackening growth.
Most area bankers expect that the pace of growth for all types of lending will ease as the year progresses. They base this forecast on estimates of slower economic growth nationwide.
Real Estate
The commercial real estate market in the Third District is
characterized as generally healthy by area real estate firms. The
office vacancy rate in the central business district of Philadelphia
is estimated at 14 percent currently, up only slightly from a year
ago. The vacancy rate is projected to be stable in 1989 and then
move up slightly as new buildings are completed in the next few
years. Suburban office vacancy rates range from 16 to 25 percent,
essentially unchanged from a year ago. Effective rent charges (rates
minus the value of concessions and services provided by landlords)
throughout the Third District are described as stable for older
office buildings but rising somewhat for new buildings.
Demand for industrial buildings has been strong, coming mainly from area manufacturers who are expanding. Realtors say the supply of new space is tight; and they believe construction of new industrial buildings may decline this year due to a pullback in lending to builders by financial institutions.
Residential realtors say sales of existing homes have declined in many parts of the Third District since the summer, and price appreciation has slowed, as potential buyers are increasingly reluctant to pay current asking prices. Realtors expect sales activity to pick up gradually this spring as sellers begin to accept lesser gains than they had been anticipating on sales of their homes. Realtors do not view current mortgage rates as a deterrent to sales.