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Federal Reserve Districts

Third District--Philadelphia

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Business activity in the Third District rose slightly in July. Manufacturers reported small increases in orders and shipments for the month after decreases in the previous three months. Retail sales of general merchandise picked up from June to July, although the year-over-year gain was marginal. Auto and light truck sales have been steady. Bank lending has been rising, with a slow advance in business lending and relatively stronger growth in consumer lending. Residential mortgage loan growth continued, but mortgage applications have begun to ease. Business at service firms has been mainly steady, although some companies have seen moderate improvement recently.

The outlook among contacts in the Third District business community is for steady or slowly improving conditions. Manufacturers forecast increases in shipments and orders during the next six months. Most of the retailers surveyed in July expect flat to just slightly higher sales in the second half of this year compared with the second half of last year. Auto dealers anticipate steady sales. Bankers expect continued slow growth in lending, but they are concerned that current levels of indebtedness will become troublesome for both businesses and households if economic conditions were to deteriorate. Service companies generally expect very slow growth during the rest of the year.

Manufacturers' shipments and orders were moving up in July compared with June, on balance, as demand for local firms' products rebounded after a three-month decline. The number of firms reporting gains exceeded the number reporting decreases by only a slight margin, however, and around half of the firms polled in July indicated that their shipments and orders were running at steady rates. Order backlogs at area plants have been edging up recently, overall, after having fallen during the spring. The improvement in manufacturing business conditions has not been widespread. Firms that make products used in residential construction continued to report strong demand. Printing companies have had increases in orders recently as have some makers of industrial machinery components and supplies. For most of the other major manufacturing industries in the region business has been flat or down.

Looking ahead, manufacturers in the region anticipate improvement. Over half of the firms contacted for this report expect increases in shipments and orders, and only a few expect decreases during the next six months. Manufacturers anticipate some acceleration in sales growth during the second half of this year and the first half of next year. If these expectations prove correct, area manufacturing firms plan some increases in employment beginning in the current quarter and continuing into 2003. Capital spending plans among area manufacturers call for increases, on balance, in the next six months, but several firms indicated that they were more likely to implement capacity expansion next year rather than this year.

Third District retailers generally reported that current dollar sales increased in July from June, although compared with July of last year sales were flat to only slightly up. Sales of seasonal merchandise picked up noticeably as hot weather took hold in the region, although several merchants noted that women's summer apparel has not been selling well, continuing the lackluster trend in sales of women's apparel generally. Sales of home furnishings continued to be fairly strong. Although sales have increased recently, retailers indicated that the average dollar value of purchases has slipped because shoppers have been buying fewer items and favoring lower-priced brands. Despite the increase in sales in July, retailers have stepped up discounting to clear summer merchandise ahead of the back-to-school sales season, which some stores are promoting earlier than usual this year.

Most of the retailers contacted in July do not expect the recently implemented reductions in federal income taxes to have much impact on retail sales. Several store executives said the lack of improvement in employment was a more significant, and negative, influence on consumption spending than tax cuts. Most of the retailers surveyed for this report forecast flat to slightly higher sales for the second half of this year compared with the same period a year ago.

Auto dealers reported generally steady sales in July. The sales rate has been supported by manufacturers' incentives and dealers' promotions to clear out current-year models prior to upcoming new model introductions. Dealers expect sales to continue to run at about the current pace, which would result in full-year sales in 2003 about 5 to 10 percent below sales in 2002.

Outstanding loan volume at Third District banks rose in June and July. Residential real estate lending continued to move up, although some banks reported that the rate at which they are receiving mortgage applications has eased. Consumer credit also continued to expand, and some banks that reduced personal loan rates recently have had strong gains. Credit card lending also remains on the rise. Banks contacted in July indicated they were increasing lending to businesses, although most said growth in business lending has been slow. Bank lending officers said most of their business borrowers had little need to expand operations and few were undertaking new business initiatives that required additional financing.

Most of the banks surveyed in June expect continued, although very slow, growth in total lending through the rest of the year. They see few signs that growth in business lending will accelerate significantly, and they expect a slowing in residential lending. While most said credit quality was not currently troublesome, some said any deterioration in business conditions could adversely affect credit quality in their commercial loan portfolios, and any further decline in employment could result in a rise in consumer delinquencies.

Stock brokers and investment management companies contacted in July generally indicated that individual investors have begun to step up purchases of equities and stock funds, although the increase has been moderate. While a shift away from bonds and toward stocks appeared to be taking place, some investment managers noted that their clients continued to focus on current income and were still favoring bonds, bond funds, and annuities over equity products.

Service firms contacted in July generally reported steady or slightly growing activity. Demand for information technology services and business consulting has been gaining somewhat, and some trucking firms serving the region reported moderate recent increases in activity. However, demand for general business services has been flat to barely rising. Most of the service firms surveyed expect very slow growth during the rest of the year. Nevertheless, nearly all of those queried indicated they were maintaining their planned capital spending programs for the year, and a few said they have scheduled slightly higher outlays for plant and equipment in the second half than initially planned.

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Last update: July 30, 2003