August 9, 1995
Economic conditions in the Third District were mixed in July. Manufacturers continued to report declines in orders for their products, and the weakening demand for manufactured goods has led to some reductions in employment at area factories. Retailers said they were entering the usual summer slow period while posting modest year-over-year gains. Most merchants said their inventories were in line with plans. Auto dealers said sales picked up in recent weeks in response to aggressive incentive programs by car makers, but dealers are skeptical about prospects for continued improvement. Bankers reported some recent gains in commercial and industrial lending, and they continued to describe competition for new business loans as strong. Consumer lending was generally described as near steady. Real estate lending has picked up a bit as home sales in the region increased in June and July. Realtors said the increase was moderate, however, and the inventory of homes for sale remains large. Commercial real estate conditions appeared be steady. Office vacancy rates--about 17 percent in the Philadelphia central business district and 15 percent in the suburbs--have changed little since the beginning of the year, according to realtors.
Manufacturing
Manufacturers in the region reported further slowing in business in
July. Four in ten of those contacted for the month said orders for
their products had slipped from the June level, an equal number said
orders were steady, but only two in ten said orders had increased.
On balance, order backlogs at Third District factories declined in
July; half of the firms surveyed reported drops in unfilled orders
while just one in ten posted gains. Several firms that produce
transportation equipment and parts for the auto industry said their
business was softening due to declining production rates in the
automobile industry, but the slowdown in manufacturing activity in
the Third District economy has affected nearly all the major
industrial sectors of the region.
In line with the slackening pace of business, Third District manufacturers have trimmed payrolls and reduced working hours. Declining demand for their products apparently has also affected pricing; surveyed companies indicated that they have kept prices for their own products steady, on balance. While area firms continue to report increased costs for supplies and raw materials increases do not appear to be as prevalent as they were in the first quarter of the year.
The overall outlook among Third District manufacturers is positive. Expectations are that there will be modest improvement in orders and shipments over the next six months. Despite the anticipated improvement in business conditions most of the companies polled do not expect to extend working hours or increase employment. Capital spending by area firms may be increased, but current plans indicate the overall gain is likely to be only marginal.
Most of the Third District retailers contacted for this report said sales in July exhibited the usual seasonal slowdown. Discount stores posted greater year-over-year gains than other types of stores. A period of above normal heat and humidity in the region boosted sales of air conditioners and fans. After a relatively cool spring, the hotter weather also appeared to provide an impetus for somewhat better sales of lawn equipment and outdoor furniture as well as summer apparel. Store inventories were generally in line with plans according to merchants.
Auto dealers reported some improvement in sales in recent weeks, but the gains appeared to be based on extensive incentive programs by manufacturers. In general, dealers do not believe the annualized sales rate will continue to move up. Most think the pace of sales will level off for the rest of this year and into 1996.
Finance
Third District bankers said lending was moving up moderately in
July. Several noted recent increases in commercial and industrial
loan activity, but nearly all of those contacted said competition
was very strong and margins were thin. Real estate lending was
picking up as well, according to bankers, driven by an upturn in
home sales. Refinancings also increased. Bankers generally indicated
that consumer lending was about steady. Some noted that they were
deliberately restricting growth in credit card debt in order to
limit or reduce delinquencies.
Real Estate
Commercial real estate brokers reported steady market conditions at
midyear. Office vacancy rates for both the city and the suburbs have
been virtually unchanged through the first half of the year. The
rate in Philadelphia's central business district was estimated at 17
percent. Vacancy rates in suburban office markets varied widely,
with the overall rate estimated at 15 percent. Realtors and property
managers said the demand and supply for Class A space remained
roughly in balance, but the supply of Class B space exceeded demand.
The supply of Class B space is likely to grow, according to
realtors, as business firms in the region continue to reduce staffs
or relocate out of the area.
Residential realtors and builders said sales picked up in June in response to declining mortgage rates and the higher sales rate was being maintained in July. The increase in sales was generally described as modest, however, and the inventory of homes for sale remained large. Builders have effectively cut prices through a variety of incentives in order to sell a larger than normal inventory of new homes built on speculation and to keep the pace of building activity from dropping. Both realtors and builders are concerned that the sales rate will dip in the seasonally slow summer months and may not pick up again in the third quarter They cite concerns about employment security as a major factor in restraining move-up buying by area residents.