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Federal Reserve Districts

Third District--Philadelphia

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Economic activity in the Third District increased in April. Manufacturers reported that shipments and new orders were up during the month. Retail sales of general merchandise rose, and the year-to-year gain improved compared with March. Auto sales increased slightly in April. Bank lending has been increasing, although demand for residential mortgages has slowed. Firms in the District's major service industries reported steady, moderate growth in business.

Third District business contacts generally expect business activity in the region to continue to expand at a moderate rate. Manufacturers expect business to continue moving up at its current growth rate. Retailers anticipate steady gains through the spring. Auto dealers expect the sales rate to be level in the months ahead and below last year's pace. Banks expect business and personal lending to increase moderately, but they forecast a decrease in residential mortgage lending. Area companies in the service industries generally expect steady growth at about the current rate.

Manufacturers in the Third District reported increased demand for their products in April. Overall, activity in this sector appeared to be growing at about the same pace as it did in the March. Around one-third of the companies contacted in April said that shipments and new orders rose from the previous month, twice as many as reported declines. On balance, area manufacturers reported an upturn in order backlogs, but no change in delivery times. Business improved in April in most of the District's major manufacturing sectors.

Overall, manufacturers expect growth in business activity to stay on an upward trend in the months ahead. Half of the firms contacted in April expect their shipments and orders to increase during the next six months; about one-tenth expect decreases. On balance, capital spending plans among District manufacturers call for modest increases in expenditures.

Most of the retailers contacted for this report indicated that sales picked up somewhat from the March pace. Sales of general merchandise increased a bit more quickly in April on both a month-to-month and year-to-year basis. Area merchants said a return to warm weather, school vacations, and Easter stimulated sales. Sales increased for most categories of merchandise, with the strongest gains in sporting goods, home and garden supplies, and spring apparel. In general, Third District retailers expect the recent rate of sales growth to persist for the next few months until the usual summer slack period.

Auto sales in the region rose slightly in April. Dealers said the sales rate in recent weeks has been somewhat better than it was earlier in the year. Foreign models continued to have better year-to-year sales comparisons than domestic models. Sales have slowed for vehicles that are not eligible for manufacturers' incentives. Inventories were said to be fairly low as dealers have kept orders to manufacturers under control and some smaller dealerships have closed. The consensus among auto dealers in the region is that sales will be close to steady for the rest of the year but slower than last year's pace.

The volume of loans outstanding at Third District banks rose from March into April, according to commercial bank lending officers contacted for this report. Commercial and industrial lending increased for most banks. Consumer lending also rose, and some banks reported increases in home equity lending. Demand for residential mortgages at banks and other financial institutions slowed. Some banks indicated that they had increased the amount of mortgage loans they were retaining in their portfolios. Banks and other lenders in the region reported that competition for loans continues to be strong and net interest margins remain thin.

Bankers in the District expect moderate growth in business and consumer lending in the months ahead but foresee further weakening in residential mortgage lending. Commercial bank loan officers contacted for this report generally indicated that credit quality remained good, but several expressed concern that rising interest rates on adjustable-rate mortgages might lead to an increase in delinquencies later in the year.

Most of the Third District service firms contacted in April reported that activity continued to expand at a steady, moderate pace. Business services firms and information technology service firms posted steady growth during the first quarter. Employment agencies and temporary help firms reported that demand for workers has been rising. Most indicated that the advance has been fairly steady, but some said hiring has picked up somewhat after a slow start to the year. Trucking firms reported increases in activity during the first quarter. Most of the service-sector firms polled expect business to continue to advance at about its current growth rate in the months ahead, although some firms that do business for government entities expect a gradual slowdown in revenues from those sources.

Prices and Wages
Business firms in the Third District reported continuing increases in costs of materials and intermediate goods, although the rate of increase does not appear to be accelerating. Manufacturers continued to face price increases for metals, petroleum-based products, and chemicals. Construction firms reported continued tight supplies for some materials. Some commercial real estate companies noted that building operating and maintenance costs have been rising. They expect tenants, especially retail stores, to raise the prices of the goods or services they market in order to cover the increases.

Employers in a range of industries reported that labor markets remain tight. Several area firms that are expanding noted that they are paying at the high end of salary ranges more often than last year for positions they need to fill. Employment agencies expect the pace of recruiting to be steady or to accelerate in the second quarter.

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Last update: April 26, 2006