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Federal Reserve Districts

Third District--Philadelphia

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Economic conditions in the Third District have shown little change in recent weeks. Manufacturers, on balance, reported a small increase in shipments and a steady rate of new orders. Retailers indicated that sales picked up for the back-to-school shopping period, although there was little improvement compared with a year ago. Motor vehicle dealers indicated that sales declined from August to September as the federal "cash for clunkers" program terminated. Third District banks reported flat loan volume, overall, and further declines in credit quality. Residential real estate agents generally noted steady sales of existing homes. Nonresidential real estate leasing and construction activity declined. Business firms in the region reported mostly level input costs and output prices in September.

The outlook in the Third District business community remained subdued in September. Manufacturers forecast a rise in shipments and orders during the next six months, on balance, although most of those expecting gains believe that they will be slight. Retailers are generally cautious. Although some retailers see signs of rising sales in the fourth quarter, most believe consumers will continue to limit spending. Auto dealers expect sales to remain slow through the rest of the year. Bankers anticipate demand for credit to remain soft while business and consumer confidence continues to be fragile. Residential real estate contacts believe housing demand will continue to stabilize, but they do not expect significant improvement until some time next year. Contacts in nonresidential real estate expect leasing and construction to remain weak into 2010.

Third District manufacturers indicated that shipments rose slightly, while the rate of new orders was steady, on balance, from August to September. Growing demand for their products was reported by makers of industrial materials and equipment, but makers of apparel, furniture, and transportation equipment reported declining demand for their products. Among firms experiencing recent gains, the increase in demand has generally been slight. Several firms said that the recent step-up in activity has been slow and uneven. One firm described its sales as alternating between being "good for a few weeks, then over a cliff for a week or two."

Third District manufacturers expect further improvement in business conditions, on balance. Among the firms polled in September, slightly more than half expect new orders and shipments to increase during the next six months; less than one-tenth expect decreases. Although the balance of opinion among area manufacturers remains positive, most forecast only slight gains. There is a general view among surveyed firms that their customers will be slow to restock inventories and purchase capital equipment in the near term. This view is consistent with area manufacturers' own plans for capital spending, which call for only steady expenditures, on balance, during the next six months.

Third District retailers reported mostly steady sales during September, and for most of those surveyed sales remained below the year-ago level. Some apparel specialty stores reported that sales picked up better than expected for the fall shopping period, but, on balance, area retailers indicated that the sales rate has not fundamentally improved compared with the summer months. Most Third District retailers continue to have cautious views of the near term, and most expect consumers to limit spending during the year-end holiday shopping period. However, a few retailers noted recent increases in store traffic, which could indicate--as one store executive said--"consumers are getting ready to buy, and the fourth quarter could be up from last year."

Third District auto dealers reported a drop in sales from August to September as the federal "cash for clunkers" program ended. The August sales boost helped dealers reduce inventories, but dealers think that the program also pulled sales into August that might have otherwise occurred in September or later. Consequently, they expect sales to be slow through the rest of the year.

Total outstanding loan volume at Third District banks has been virtually level in recent weeks, according to bankers contacted for this report. There has been a small gain in consumer lending, but residential real estate lending has been flat and business lending has declined. Most of the bankers contacted for this report said that demand for business loans has been weak. One banker noted that "despite active calling by our lending officers, there is not much interest on the borrowers' side." Most of the banks contacted for this report said that credit quality continued to deteriorate for all categories of lending. Bankers generally expect demand for credit to remain weak due to businesses' and consumers' lack of confidence that economic conditions will improve significantly in the near future. Sources reported that lending by nondepository financial companies remains limited, especially for real estate and construction.

Real Estate and Construction
Sales of new and existing homes were flat in most parts of the Third District as summer came to an end, according to local real estate agents. They generally indicated that sales were somewhat stronger for lower-price homes, which some attribute to the tax credit for first-time home buyers. With respect to higher-price homes, an agent reported that "the upper tier is still very, very slow." Although some builders reported increased traffic, sales gains have been--as one builder expressed it--"minimal." Real estate agents in most parts of the District reported that selling prices have been unchanged or have fallen somewhat in recent months. Some builders have offered increased incentives or low-cost financing to buyers. With the end of the busy season for home sales, real estate agents and builders are looking to next year for signs of greater demand. However, they expect improvement to be slow.

Nonresidential real estate firms indicated that leasing and purchase activity declined during the past few months. Vacancy rates continued to rise for apartments and office, industrial, and retail buildings. Contacts reported that tenant downsizings and business terminations were resulting in the return of space to the market. There has also been a substantial increase in sublease space coming on the market. Rents have declined, especially for older buildings. Contacts expect nonresidential real estate markets to remain soft for some time. One contact said, "markets will struggle through the remainder of this year, and they will still face challenges in 2010."

Reports on input costs and output prices have been mixed since the last Beige Book. Manufacturing firms noted increases for the commodities they use but reported decreases in the prices of the products they make, with the exception of metals, for which prices have been raised. Retailers continued to indicate that their cost of goods has been about steady, and they have generally kept their selling prices steady. Some builders reported stepped-up incentives to promote new home sales.

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Last update: October 21, 2009