December 1, 2004 Federal Reserve Districts Third District--Philadelphia

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Business conditions in the Third District improved moderately in November. Manufacturers reported increases in orders and shipments during the month. Retailers indicated that sales of general merchandise rose in November compared with October and with November of last year. Auto sales have been steady in recent weeks. Banks and other lending institutions reported that overall lending continued on an upward trend, although some noted that residential mortgage refinancing activity had decreased. Sales of new and existing homes have been steady. Commercial real estate vacancy rates have shown little change, but rents continued to decline. Contacts in the Third District business community generally expect economic activity in the region to expand at its current pace through the winter. Manufacturers anticipate increases in shipments and orders during the next six months. Retailers expect sales for the Christmas shopping season this year to exceed last year's by a moderate amount. Auto dealers expect sales to be level through December. Bankers believe overall lending will remain on the rise, although they anticipate a slowing in growth of residential mortgage activity. Real estate agents and home builders expect home sales to remain close to the current pace. Contacts in commercial real estate expect the demand for office and industrial space to rise gradually during 2005. Manufacturing Manufacturing activity in the Third District increased moderately in November. Around four out of ten of the manufacturing firms surveyed during the month posted higher shipments and orders compared with the prior month, and less than two in ten reported decreases. Order backlogs at area plants were steady from October to November, but delivery times edged down. Business conditions varied among the major manufacturing sectors in the region. Growing demand was generally reported by makers of electrical machinery, measuring and controlling instruments, chemicals, and primary metals. Some slowing in demand was reported by makers of furniture, transportation equipment, and paper products. The region's manufacturers generally expect further gains in business activity. Around six out of ten of the firms surveyed in November expect their shipments and orders to increase during the next six months, and less than one in ten expect decreases. On balance, area manufacturing firms are scheduling increases in capital spending and planning to add employees. Despite mixed reports on current conditions among the region's major manufacturing sectors, the outlook is positive in almost all of them. Third District manufacturers continued to report rising prices, with about the same percentage of firms noting increases during November as in October. Area manufacturers expect further increases in input and output prices during the next six months. They also anticipate sharp increases in the cost of employee health benefits for 2005. Retail Retail sales of general merchandise increased moderately in November compared with October and with November of last year. Sales gains were noted across most store types and merchandise lines, although a few merchants reported that sales of men's apparel have been slow. Store executives expect sales to rise gradually as Christmas approaches. Most of those contacted for this report expect Christmas holiday sales this year to exceed last year's by around 4 percent, in current dollars. They also expect a substantial portion of the season's sales will be posted in January as shoppers use gift cards received over the holidays. Store executives generally indicated that temporary hiring for the season is about in line with last year amid continuing efforts to limit personnel expense year-round. Auto dealers in the region reported roughly steady sales in November at around the same rate as in October. Manufacturers have stepped up promotions, and dealers expect that a year-end marketing push will maintain the sales rate close to its current pace through December. Finance Outstanding loan volume at Third District banks rose in November, according to banks contacted for this report. Commercial and industrial loans have been growing, with much of the new borrowing being done by middle market firms in the business and professional services sector. Bankers noted that revenues of their business borrowers have been improving and the credit quality of their business loans has been good. Competition for business loans among banks and nonbank lenders continues to be strong. Consumer credit has increased moderately, and some banks noted recent gains in home equity lending. Banks generally indicated that residential real estate lending expanded in November, although refinancing activity eased. Bankers in the District expect overall lending to rise in the months ahead. They expect further gains in business and consumer lending at or above the current growth rate, but they anticipate a slowing in growth of residential real estate lending. Investment companies and stock brokers in the region have been receiving strong cash inflows. Some indicated that growth in business has been steady since midyear, and others said the increase has been recent. In response to the expanded activity, some securities firms are raising staffing levels. Real Estate and Construction Commercial real estate firms in the Third District reported that vacancy rates in the region's office markets have been roughly steady in the past few months. However, effective rents have declined as landlords compete for new tenants and lease renewals. Commercial real estate firms expect office vacancy rates to move down in the year ahead in most parts of the region. They expect a turn toward better balance between supply and demand in suburban markets, but not in the Philadelphia central business district, where new construction spurred by local tax abatements has added significantly to the amount of office space available. Industrial building vacancy rates have changed little in recent months, but rents have declined in most parts of the region. However, there are some areas of strong demand, and construction of industrial and multi-use buildings has picked up somewhat in these areas. Residential real estate agents indicated that sales have been roughly steady in recent weeks. Homebuilders also reported steady sales. Price appreciation continues for existing homes, and builders in many parts of the region have been raising prices for new homes. Real estate agents in some areas said there has been a slight increase in the amount of time houses are on the market before being sold, but most residential real estate contacts indicated that demand continues to be strong. Both builders and real estate agents expect the pace of sales to remain roughly steady. They anticipate rising employment and incomes to cushion the effect of potential increases in mortgage interest rates as long as the upturn in rates does not exceed one or two percentage points. Return to top New York Cleveland