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Third District--Philadelphia

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Economic activity in the Third District expanded in May, but the pace of growth appeared to ease. Manufacturers reported increases in orders and shipments during the month, although the gains were not as widespread as in April. Retail sales of general merchandise edged down during the month, and auto sales fell. Banks reported that lending continued on an upward trend in May, although at a slower rate compared with April. Commercial real estate market conditions showed little change, although leasing activity has been on the rise. Sales of new and existing homes continued at a brisk pace.

Third District business contacts generally expect improvement in the region's economy in the months ahead, but not a strengthening in growth. Manufacturers expect increases in shipments and orders during the next six months. Retailers anticipate an improved rate of sales during the spring, with modest year-over-year gains. However, auto dealers expect slower sales for the rest of the year. Commercial real estate contacts forecast gradual tightening in office markets. Residential builders and real estate agents expect sales to continue at high rate, but some expect sales for the year as whole to be lower than last year.

Manufacturing
Manufacturing activity in the Third District continued to expand in May, although fewer firms reported growth during the month than in April. Around one-third of the manufacturing firms surveyed had increases in new orders and shipments in May compared with April, and around one-fifth reported decreases. Order backlogs were unchanged from April to May, and delivery times were steady. Growth in business was reported among firms in most of the District's major manufacturing industries, with the most widespread gains being among producers of metal and wood products.

The region's manufacturers generally expect further growth in business activity, although their expectations are not as robust as they were earlier in the year. Around one-third of the firms surveyed in May expect their shipments and orders to increase during the next six months, and about one-fifth expect decreases. Capital spending plans remain positive, on balance; about one-fourth of the surveyed manufacturers plan to increase capital expenditures in the next six months, half plan steady spending, and about one-tenth plan to reduce capital outlays.

Third District manufacturers reported rising prices in May, on balance, although the number of firms noting increases during the month was lower than in earlier months this year. Firms in all but a few of the major manufacturing industries in the region indicated that they had experienced increased input costs and raised prices for their own products in May compared with April. During the next six months almost one out of two of the manufacturers polled in May expect increases in input prices, and about one out of ten expect decreases. About one out of four plan to increase the prices of their own goods, and around one out of six expect to reduce prices. This represents less widespread expectations of higher prices than in earlier months of the year.

Retail
Retailers generally reported declines in sales in May compared with April. Most said cold and rainy weather deterred sales of spring apparel and other seasonal merchandise. Retailers gave mixed reports on their year-to-year comparisons. Although some posted flat sales or slight gains, several had lower sales than in May of last year. Retailers expect sales growth to resume in the months ahead, but most look for only modest gains. Merchants continue to be concerned that consumers are limiting their buying of general merchandise as they cope with high gasoline prices. Most of the retailers contacted in May indicated that wholesale prices of the goods they are purchasing have been roughly steady, but several store executives noted that fuel surcharges are now common for goods shipped to them.

Auto dealers in the region generally reported declines in sales in May compared with April and with May of last year. Inventories have risen, and a large number of dealers have boosted leasing promotions to move cars off their lots. Dealers do not expect the sales rate to improve, and they believe sales for the year as a whole will be below last year.

Finance
The volume of loans outstanding at Third District banks rose in May compared with April, according to banks surveyed for this report, although some noted slower growth during the month. Commercial and industrial loans have been increasing, and bankers said the new borrowing has been for capital expenditures by firms in a wide range of industries. Lending for residential mortgages, home equity loans, and home equity credit lines was also on the rise. Banks and other mortgage lenders reported strong demand for purchase mortgages, but they indicated that refinancing activity was slower than they had expected. Credit card lending has also been growing, but bankers generally indicated that other types of personal loans have been about flat. Looking ahead, bankers in the District expect continued growth in the regional economy, and they expect overall lending to rise in step with the expansion in business.

Real Estate and Construction
Commercial real estate firms reported that vacancy rates in the region's office markets have been steady in the past few months, and that rental rates have eased slightly. Leasing activity has been fairly strong, but commercial real estate firms noted that tenants were signing for shorter terms on new or renewed leases. However, some tenants have signed for more space than they currently need, in anticipation of growing business. Commercial real estate agents expect tightening in the region's office markets during the rest of the year. Industrial building vacancy rates have risen slightly in recent months, as speculative buildings have come on the market, but commercial real estate contacts believe demand for space will grow during the rest of the year.

Residential real estate agents indicated that sales have picked up, and that the pace of sales in May was brisk. Although many real estate agents anticipate sales for this year will not match those of last year, they generally believe a high sales rate is likely this summer as long as mortgage interest rates remain around current levels. Homebuilders reported continuing high demand for new homes and large backlogs. House prices continue to appreciate for both new and existing homes. Builders indicated that costs of materials and labor have been rising slightly, and they reported continuing steep increases in land prices.

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Last update: June 15, 2005