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Beige Book Report: Philadelphia

March 15, 1989

Indications from most sectors of the Third District economy in late February and early March suggest very moderate growth. Manufacturers are posting modest gains, with increases in shipments and orders, while employment is flat and order backlogs are edging down. Retailers say the first two months of the year ran about on plan, as dollar sales rose about 5-10 percent above last year's level. Auto dealers indicate that unit sales are running about even with the year-ago pace. Bankers report fairly steady growth in lending. but note that deposit growth is slipping.

The consensus outlook in the Third District business community is subdued. Manufacturers anticipate only steady activity over the next six months, although this is an improvement from January and February when they were forecasting a downturn. Retailers expect real sales this year to be around even with last year's results, but they say the spring season could be adversely affected by the early Easter. Auto dealers believe they can match last year's unit sales as long as interest rates hold steady or increase only "moderately.' Bankers foresee some easing in business loan demand over the next two quarters but they expect both consumer and real estate lending to stay on their growth trends.

Manufacturing
Preliminary results of the Business Outlook Survey for March indicate that manufacturing activity in the Third District continues to gain slightly. Twenty-six percent of the survey participants responding in early March said their business was moving up from last month while 12 percent reported slower operations. Specific measures of industrial activity reflect this fractional growth. Area firms are booking more new orders than they did last month and they are stepping up shipments enough to work down order backlogs a bit. Inventories are level with last month. Employment shows only a little improvement as both payrolls and working hours are moving up just marginally.

Survey respondents continue to report rising prices, although such indications do not appear to be as widespread this month as they have been for the past year. Nearly one-half of the firms polled for the March survey are paying higher prices for purchased goods compared to a month ago and one-quarter are charging more for their own products.

Local manufacturers forecast only steady activity for the next six months, an improvement from the January and February surveys in which expectations of a downturn prevailed. The balance of responses to the most recent poll indicates that managers at area plants expect the rate of both new orders and shipments to be fairly flat for the next two quarters, and they anticipate a further decline in order backlogs. In accordance with these expectations, local firms' employment plans call for steady payrolls and some shortening of the workweek between now and September.

Retail
Retailers contacted in late February said that sales since the beginning of the year have been about even with plans, and that inventories remain under control. Growth in dollar sales are generally reported to have run 5-10 percent above last year for January and February. Discount merchants have achieved somewhat better results than other retailers, probably due to greater promotional efforts, according to store officials. Most retailers say apparel sales are showing some improvement after the slowdown of the past few years, and several merchants noted renewed consumer demand for hard goods and electronic items.

Retailers say the outlook is problematic. Store officials note that with an early Easter, such as this year's, consumers tend to do less holiday shopping while postponing purchases for warm-weather apparel and other merchandise, thus raising the possibility that sales for the spring season overall could be weak. Consequently, merchants do not expect to be able to get a clear reading on first half results until the spring season is well underway. Looking further ahead, the prospect is still unclear. Several merchants have noted unusually large day-to-day variations in sales in the past two months, and they interpret this as indicating a fragile edge to an apparently high level of consumer confidence. At this time, the most optimistic retailers generally expect real sales in 1989 as a whole to match those of 1988.

Third District automobile dealers report a pickup in sales in late January as manufacturers stepped up incentives in response to some mid-January slowness. Dealers believe that matching last year's rate of unit sales is possible this year as long as consumer Income remains strong and interest rates do not rise sharply. Nevertheless, dealers say their profit margins remain under pressure from rising costs and declining gross receipts.

Finance
Loan volume outstanding at major Third District banks in February was approximately 13 percent above the year-ago level and bankers contacted in early March said this pace of growth was being generally maintained. Some bankers noted a slowing of growth in consumer loans, including home equity credit lines, which they said is at least partially seasonal.

Most of the bankers contacted for this report anticipate an easing in the expansion of commercial and industrial lending as the year progresses. Although they do not foresee a substantial slackening in overall economic activity in the next two quarters, they do believe credit demand by businesses will ease. Most expect consumer and real estate lending to continue growing at their current rates through the greater part of this year and possibly beyond.

The rate of growth in bank deposits continues on the slowing trend that began last November, according to Third District bankers. Demand deposits have fallen since the start of the year, and bankers say some of that money has been shifted into interest-bearing accounts. In order to maintain asset growth, some bankers say they are more likely to boost deposit rates to gather funds than to borrow in the money markets given the current interest rate differential. However, others believe the recent run-up in rates will be short-lived, and they will accept slower asset growth temporarily in anticipation of lower funding costs later this year.