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Federal Reserve Districts

Third District--Philadelphia

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Business activity in the Third District continued to advance slowly in August. Manufacturers reported increases in orders and shipments for the month. Retail sales of general merchandise picked up in August for the usual back-to-school shopping period, although the year-over-year gain appeared to be slight. Auto and light truck sales have been strong as model year close-out promotions boosted the sales rate. Bank lending has been rising slowly, with most of the gain coming from residential lending. Commercial real estate markets remain soft, but home sales have increased. Overall tourism business for the summer season appears to be matching last year's level, but lodging activity is off from last summer.

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 August expect sales to rise slowly through the fall. Auto dealers anticipate some slippage in sales after 2003 models are cleared out. Bankers expect slow growth in lending as the pace of economic activity in the region gradually rises.

Manufacturers' shipments and orders increased in August compared with July. More than one in three of the companies surveyed in August reported increases in demand for their products and less than one in five reported decreases. Improvement in business conditions appears to be spreading across the major manufacturing industries in the District. Firms that make products used in residential construction reported increases in orders in August, continuing the strong demand they have had in previous months this year. Manufacturers of industrial equipment, which had experienced generally lackluster conditions for the past 12 months or longer, reported increases in demand in August. There were gains for makers of many industrial products, such as primary and fabricated metals, machinery, and electrical equipment. However, chemical producers and instrument manufacturers reported a falloff in orders in August.

The outlook among the region's manufacturers is positive. Around half expect increases in shipments and orders during the next six months, and less than one in five anticipate decreases. Area manufacturers forecast some increases in employment and working hours, on balance, in the next six months, and they plan to step up capital spending plans moderately.

Third District retailers generally reported that current dollar sales increased in August from July, although the year-over-year gain appeared to be slight, according to most of the stores surveyed. Sales of back-to-school supplies and apparel have been good, but some women's clothing stores continue to report weak sales. Some merchants said they have seen a pickup in sales due to the federal income-tax rebates, but others said consumers continue to be cautious in their spending. These merchants noted that many shoppers are favoring lower-priced brands and concentrating their buying at discount stores and manufacturers' outlets. Some stores have been left with undesired inventories of summer merchandise, although several noted that warm weather apparel was continuing to sell fairly well, and sales of home furnishings remained healthy.

The consensus among retailers contacted in August is that sales will move up slowly during the fall. Several store executives said they will introduce cold-weather merchandise later than usual this year and keep inventories limited. These retailers said consumers have been showing a greater tendency to delay purchases until their needs are more immediate. Merchants are responding by timing the introduction of seasonal merchandise more closely to the relevant season.

Auto dealers reported generally rising sales during August. Manufacturers boosted incentives to clear out 2003 models as 2004 models arrive. Dealers are taking delivery of new models, and consequently, their inventories are high. In general, dealers expect it will be difficult to maintain the current rate of sales once older model inventories are depleted, but most dealers anticipate a high sales rate for the most popular new domestic cars and trucks and continued strong sales of luxury imports.

Outstanding loan volume at Third District banks was growing slowly in August. Residential real estate lending continued to move up, mainly for home purchases, while refinancing activity has declined. Consumer credit also increased, although recent gains in most categories of personal lending, including credit cards, have been modest at most of the banks contacted for this report. Business loan volume outstanding has been practically flat, according to bank lending officers. They said most of their commercial and industrial borrowers have not had the increases in business that necessitate expansion.

Bankers surveyed in August expect business activity in the region to move up very gradually, and they expect total lending to rise slowly along with the improvement in regional economic conditions. Some also said they expect at least a slight deterioration in credit quality, unless the recovery in the region's economy strengthens.

Real Estate and Construction
Commercial real estate firms in the Third District reported that overall office vacancy rates have increased in suburban markets, where several new buildings have recently become available with substantial amounts of space not pre-leased. Vacancy rates in suburban markets were estimated in a range of 12 to 24 percent, up around 1 percentage point since the spring. The vacancy rate in the Philadelphia central business district has been nearly steady at around 13 percent, virtually unchanged in recent months. Effective rental rates continued to decline as landlords offer tenant improvement allowances and rent-free periods, and several major tenants have negotiated renewed leases at lower rents. Commercial real estate contacts say office vacancy rates will probably begin to edge down near the end of the year as the number of new buildings becoming available declines.

Residential real estate agents and home builders generally reported that sales have accelerated. They said the recent upturn in mortgage interest rates prompted a rush to complete sales of both new and existing homes. Home builders generally expect sales to remain strong, although some indicated that their backlogs appear to have peaked. Real estate agents expect a strengthening economy to support a fairly good rate of home sales despite higher mortgage rates.

Tourism officials in the region reported that tourist and vacation locations have had mixed results this summer. Periods of cool and rainy weather have resulted in fewer visits to beach resorts. Lodging and other business activity in some of these areas have been less than last year. In particular, vacation home rentals have not met expectations. Tourist visits to urban areas have been fairly high. Some museums have broken attendance records, and many summer entertainment programs and performing arts festivals have had high attendance. On balance, it appears that the region's overall tourism-related business this summer will be roughly equal to last year's, but lodging activity will probably be down.

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Last update: September 3, 2003