Beige Book Report: Philadelphia
May 3, 1989
Reports from most sectors of the Third District economy in mid-April suggest little growth overall in the past two months. Manufacturers in general indicate that business has been just steady, although nondurable goods producers note a pickup in April. Retailers report only slight year-over-year gains in total sales for March and April, and an actual decline in sales of big-ticket items in recent weeks. Auto dealers say sales slipped in March and continue to run below the annual selling rate achieved earlier in the year. Bankers generally report that overall loan growth continues at a healthy pace, but several major banks note some easing in the rate at which they are adding to the volume of commercial and industrial loans outstanding. Deposit growth continues to run below targeted rates at many banks, but none indicate that they are restricting asset growth due to funding constraints. Several banks have gained new funds with promotions of 18-to-24-month certificates of deposit.
Looking ahead, Third District business contacts see only slight improvement, at best. Manufacturers expect only steady business over the next six months. Retailers expect dollar sales for the spring and summer to run even with or just marginally above the same period last year, and auto dealers anticipate unit sales for all of 1989 to fall as much as 10 percent below last year. Bankers expect overall loan growth to stay close to its current pace, but they anticipate some slackening in the expansion of commercial and industrial lending in the second half of the year.
Manufacturing
Activity in the Third District industrial sector appears to be
easing to a steady pace. Just over half of the manufacturers
contacted in late March and early April reported that business was
stable, and the number noting improvement barely exceeded the number
indicating that their business was slowing. Reports of improvement
were common among nondurable goods producers while most makers of
durables said business has been flat in recent weeks.
Overall, executives at area industrial firms generally noted modest increases in new orders and a fractional rise in shipments but no change in order backlogs during March. On balance, area firms are permitting inventories to run down for the fourth month in a row. Employment is holding up as area manufacturing firms added marginally to payrolls during March.
Industrial prices in the region continue to rise. Nearly half of the manufacturers contacted in April said input costs moved up from a month earlier and one-quarter raised the prices of the products they make. The increases do not appear to be accelerating, however, as reports of higher prices are not quite as widespread now as they were over the winter. Nevertheless, local manufacturers generally expect continued upward price pressure.
Looking ahead, local manufacturers see virtually steady conditions over the next six months. About a third of those polled in April expect improvement while nearly as many anticipate slower business between now and October. On balance, managers at area plants foresee modest growth in new orders and shipments, but they expect order backlogs to remain steady and they plan to work inventories down further from current levels. On the employment front, industrial firms in the region plan to maintain payrolls at current levels, but they may make some reductions in the workweek during the spring and summer. On balance, local firms continue to schedule hikes in capital spending, although there are increasing reports of projects being postponed, especially in heavy industries.
Retail
Third District retailers contacted in mid-April generally indicated
that sales for March and early April were only slightly above sales
for the same period last year, on a current dollar basis. While some
stores, particularly those selling upscale goods, reported
satisfactory year-over-year growth, many merchants describe the
current situation as "difficult." Several retailers noted that sales
of big-ticket items have edged down recently.
Store officials expect dollar sales for the balance of the spring and summer to run about even with or marginally above the year-ago pace, but they are concerned that consumers could grow cautious in the months immediately ahead if economic news is not good.
Labor costs are still considered a problem by Third District merchants as the pool of qualified job applicants, especially in suburban areas, remains well below retailers' needs. Several large discount chains have announced plans to enter the region, and local merchants expect the competition for workers to be as intense as the competition for customers.
Third District auto dealers report that sales slipped in March and remain below the annual selling rate recorded earlier this year. Import dealers have suffered a worse decline than domestic dealers have, but the domestic dealers note that sales of light trucks, which had been strong for the past few years, have fallen off recently. Despite the introduction of rebates and incentive financing by the manufacturers, area dealers expect unit sales for this year to be as much as 10 percent below last year's level.
Finance
Total loan volume outstanding at major Third District banks at the
end of March was 13 percent above March 1988, marking a year of
steady growth. Real estate lending remains the fastest growing major
loan category. Commercial and industrial lending is growing at a
healthy rate, according to bankers contacted in mid-April, although
they note some slowing from the growth rate recorded in the first
quarter. Consumer lending is expanding but at a slower pace than
other loan categories, and bankers believe growth may ease further.
Total deposits at large Third District banks at the end of March were 8 percent above the March 1988 level, with demand deposits virtually unchanged from a year ago and other checkable deposits up about 5 percent. Bankers report that growth in the volume of money market deposit accounts has eased substantially since January while time deposits continue to expand at a good pace. Several banks are promoting certificates of deposit with maturities up to two years, and they are obtaining significant amounts of new funds at less than 50 basis points above the federal funds rate.