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Beige Book Report: Philadelphia

June 19, 1996

Economic activity in the Third District was increasing moderately in late May and early June, according to reports from various industry sectors. Manufacturers were continuing to see some gains in new orders and shipments. Retailers indicated that sales had picked up seasonally and were running a bit above the year-ago pace. Auto and light truck sales remained healthy, according to dealers, but sales of heavy-duty trucks have been slow. Bankers generally described lending as just steady overall. Residential realtors and home builders have seen increased sales in recent weeks. Commercial real estate markets were improving also, according to property managers. They reported a slight decline in office vacancy rates and some firming of rental rates since the beginning of the year, and they said that demand for warehouse space remained strong.

Manufacturing
Reports from Third District manufacturers in early June suggested that industrial activity was moving up modestly. Just over one-half of the firms contacted said their business was steady while one- third noted improvement. Gains were fairly widespread among the major manufacturing sectors in the region although lumber producers were seeing declining orders and instrument makers' shipments were falling. Overall, however, both new orders and shipments were moving up for area manufacturers. Area firms were also increasing employment, but gains appeared to be slight. On balance, manufacturers were trimming inventories, but there were few reports that stock levels were inordinately high, some firms in the paper and apparel industries noted higher than desired inventories.

Most area manufacturing firms reported that the prices they were paying for inputs and the prices they were charging for their products had been steady. Firms purchasing agricultural commodities continued to note that they were facing higher costs for raw materials, but most have not passed on these higher costs in the prices of their own products.

Retail
Third District retailers said that above-normal temperatures in early May prompted sales of seasonal merchandise, such as air conditioners and summer apparel, but cooler weather in late May limited the gains. Nonetheless, in general, merchants contacted in early June said they were posting year-over-year dollar increases of a few percent. Most also said they were limiting promotional efforts and keeping inventories under control.

Auto dealers said sales of cars and light trucks have been good in recent weeks, in part because of the availability of manufacturers' rebates and price reductions to clear out end-of-model-year vehicles. Dealers continued to indicate that sales of used autos have been strong. A less positive trend characterizes the market for heavy-duty trucks, where sales have been flat.

Finance
Third District bankers generally described loan demand as steady in early June. Demand for business credit has not been strong, and nonbank lenders have been competing for loans to middle market and small business firms. Bankers contacted for this report also said their consumer loan volumes have been essentially flat, partly because of slower growth in demand and partly because they were implementing somewhat stricter credit standards, especially for credit cards. Overall, Third District banks reported they were not adding to real estate loan volumes; however, there were reports that insurance companies have stepped up real estate lending in the region recently.

Real Estate and Construction
Commercial real estate agents generally reported some improvement in conditions in major office markets of the Third District. According to commercial property companies that have conducted recent surveys, vacancy rates have edged down since the beginning of the year in the Philadelphia central business district to around 15 percent, and in most suburban areas in Pennsylvania to a range of 10 to 14 percent. The vacancy rate for office buildings in southern New Jersey has been flat at around 21 percent. Effective rents have been firming, according to commercial realtors, and there were fewer large blocks of space available. Realtors said this could prompt some build-to- suit or speculative office construction.

Demand for industrial space, especially warehouses, has remained strong in the region, according to realtors. Although the vacancy rate for industrial space has shown little change since the beginning of the year, commercial real estate agents said many currently unoccupied buildings are obsolete and were not attracting occupants. Instead, companies requiring space were contracting for new buildings, and there was some speculative construction as well.

Residential real estate sales have picked up in the region this spring, and housing construction has increased. Realtors said demand for new homes was relatively stronger than demand for existing homes and this was limiting price appreciation for existing homes that were being sold. Builders and realtors reported that purchases by first-time home buyers were underpinning sales of townhouses and homes at the lower end of the price range. Realtors said recent increases in mortgage rates did not appear to have had a significant effect on prospective home buyers' willingness to buy.