August 7, 1991
Economic conditions in the Third District in late July appeared mixed. Manufacturers indicated that business continued to improve. Reports from retailers varied; but, overall, sales appeared to be sluggish. Bankers generally were experiencing declining loan demand. Real estate contacts said commercial leasing activity was slow but showing some signs of improvement, and residential sales were picking up also; however, construction activity remained weak.
Overall, sentiment among Third District business contacts is slightly positive, although reservations about commercial real estate persist, and the outlook for bank lending is clouded. The balance of opinion among manufacturers is optimistic, with improvement anticipated in orders and shipments, and gains forecasted for employment. Retailers look for some slight improvement in the fall and winter. Bankers said a rebound in lending is dependent upon an economic recovery, which they do not believe is firmly established yet. Realtors expect further increases in residential sales, but believe significant improvement in commercial activity is at least a year away. The pace of construction is expected to remain slow.
Manufacturing
Manufacturing activity in the Third District continued on the
uptrend that began in May, according to firms contacted in July.
Although half of the companies polled reported just steady business
in recent weeks, one-third noted improvement. Gains were fairly
evenly spread across industries in the region except for
manufacturers of industrial equipment and building products; these
firms indicated that demand for their products remained weak.
Overall, however, both new orders and shipments were moving up at
plants in the District, and both delivery times and order backlogs
were edging up.
Improving business conditions were not being accompanied by increases in employment. Two-thirds of the manufacturers contacted said they were holding the line on payrolls, and one-fourth were making cuts. Most firms also reported no change in the length of the workweek in July, and those reporting increases just offset those reporting decreases.
Looking ahead, most of Third District manufacturers surveyed expect business to continue to improve over the next six months. On balance, they foresee gains in new orders and shipments. In line with this outlook, they plan to add workers and step up capital spending during the rest of the year.
Retail
Retailers contacted in late July gave mixed reports on recent sales
results. Some specialty retailers, particularly those selling
apparel and jewelry, indicated that sales were improving, but
general merchandise and department stores appeared to be
experiencing sluggish sales. Some store officials said that although
hotter than normal weather boosted sales of fans and air
conditioners, the heat was having an overall depressing effect on
sales by reducing store traffic.
Opinions about the balance of the year vary. Some merchants believe a pickup may begin, this fall but others think that sales could remain slow until the Christmas shopping season. Few merchants expect a strong recovery, and some said they were being cautious in placing orders for merchandise intended to be sold during the fourth quarter.
Auto dealers generally indicated that sales slipped somewhat in July after a pickup in June. The selling rate has varied considerably month-to-month so far this year, according to dealers, and they say it is difficult to predict sales for the second half. On balance, however, they expect auto sales will improve only slowly even with an overall economic expansion.
Finance
Most Third District bankers contacted in late July said loan volumes
outstanding were falling in nearly every credit category. Home
equity loan volume was showing the least slippage, and some bankers
said they were promoting these loans aggressively. Other types of
consumer credit have been declining at a more rapid rate, as have
real estate and business loan volumes. While some bankers said they
were continuing to trim real estate portfolios, several said they
were stepping up promotion efforts for business lending but meeting
slack demand from creditworthy potential borrowers.
Third District bankers generally indicated that they expect loan demand to remain slack in the near future. Several said they did not believe an economic recovery was firmly under way yet, and most expect only a slow expansion following the current recession. Nevertheless, some optimism was expressed that loan growth would resume with a recovery as consumer demand increases and improved business revenues qualify more firms for credit.
Real Estate and Construction
Third District real estate executives reported that commercial
leasing activity for the first half was quite low compared to the
past few years, but some noted a pickup in the past month. Estimates
of vacancy rates for office space in the Philadelphia area range
from 14 percent for the central business district to 26 percent in
some suburban areas. Some realtors believe vacancy rates could
decline during the second half given the lack of significant
construction activity in the region; however, most expect that solid
improvement in overall commercial real estate--including hotel,
retail, and office space--is at least a year away.
Residential realtors expressed some optimism that the sales trend may be improving. Many reported a sales pickup in February and March, and, while there are indications that the upward momentum has flagged recently, realtors do not expect sales to fall off, after taking into account seasonal factors.
Overall, construction activity in the Third District remains weak and the latest reports on new contract values in the Philadelphia SMSA (May) indicate a continuing downward trend. Industry contacts polled in July said that some financially strong residential builders were continuing work on projects and that some new commercial construction was being planned for the fall; but, overall, private construction activity is expected to remain low. Significant increases in public construction are precluded by budget pressures on state and local governments, according to industry sources.