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Federal Reserve Districts

Third District--Philadelphia

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Economic activity in the Third District continued to expand in May. Manufacturers reported increases in orders and shipments during the month. Retailers indicated that sales of general merchandise rose in May compared with April and with May of last year. Auto and light truck sales slowed a bit from April, according to dealers, but rose on a year-over-year basis. Banks and other lending institutions reported that overall lending continued on an upward trend, although mortgage refinancings have declined. Home sales continued to run at a brisk pace, but commercial real estate markets remained soft.

The consensus in the Third District business community is that the regional economy will continue to improve during the rest of the year. Manufacturers anticipate increases in shipments and orders during the next six months. Retailers expect sales in the second half of the year to exceed sales in the same period last year. Auto dealers are less optimistic, but they still expect this year's sales to be close to last year's. Bankers expect business and consumer lending to increase, but they anticipate a slowing in residential mortgage activity, primarily as a result of a decrease in refinancings. Real estate agents and home builders expect continued strong demand for homes, but contacts in commercial real estate see few signs that demand for space will strengthen appreciably this year.

Manufacturing activity in the Third District continued to increase in May, although monthly gains were not quite as common among regional manufacturing firms as they were in April. Around four in ten of the firms surveyed in May posted higher shipments and orders compared with the prior month, and around two in ten reported decreases. Overall, there were small increases in order backlogs and delivery times at area plants. Firms in all the major manufacturing sectors in the region except transportation equipment and food products indicated that business conditions were improving. Increases in demand were especially strong for firms producing lumber products, furniture, chemicals, and metal products.

Manufacturing firms in the region continued to report rising input prices in May. Price increases for steel and steel products and for wood and lumber products were widespread. Manufacturers also indicated that these products were in short supply or subject to delays in delivery, limiting production rates. Nearly half of the manufacturing firms contacted for this report indicated they have raised the prices of their products since the beginning of the year. Price increases were most prevalent among makers of lumber products, furniture, stone, clay, and glass products, and metals and metal products.

The region's manufacturers expect further gains in business activity. More than half of the firms surveyed in May expect increases in shipments and orders, and less than one in five expect decreases during the next six months. Area manufacturing firms are scheduling increases in capital spending and are planning to add employees in the next six months.

Third District retailers generally reported continuing growth in sales during May. Most types of stores indicated that sales for the month were at least a few percent above last year's results. Several merchants indicated that their annual gain for May was somewhat below the annual gain for April; however, they said the year-over-year increase might have been limited because the late Memorial Day holiday this year tended to move some summer and vacation-oriented shopping into June. Sales early in June support this conjecture, according to some of the merchants contacted for this report. Merchants said summer apparel was selling well and luxury goods continued to be in high demand. Store executives indicated that inventories were in-line with the pace of sales.

Third District retailers expect sales for the summer to be above the same period last year. Most store executives said there does not appear to be a decline in customer traffic or purchasing that could be attributed to the impact of higher gasoline prices. With regard to other prices, some merchants said they have recently seen increases in the costs of some of the goods they obtain from domestic manufacturers. Retailers have not raised their own prices on a large scale, but some merchants noted that price markdowns have been curtailed.

Auto dealers reported a slowing in sales in May compared with April, although May sales appear to be above the year-ago result. Dealers indicated that sales of large sport-utility vehicles have sagged, but smaller, more fuel-efficient versions have been in increased demand. Inventories are generally above desired levels. Despite the uncertainty over gas prices, dealers in the region expect unit sales for the second half of this year to be close to unit sales in the second half of last year, although some speculate that smaller vehicles will make up a greater portion of total sales this year.

Outstanding loan volume at Third District banks rose in May, according to banks contacted for this report. Commercial and industrial loans were on the rise at commercial banks and nonbank lenders. Consumer credit and home equity lending have been growing also. Residential real estate lending has continued on an upward trend for home purchases, but refinancing activity has slowed. Some lenders noted a shift to second mortgages in lieu of refinancings by borrowers seeking to obtain credit for home-related expenditures.

Bankers in the District generally expect overall lending to rise during the rest of the year. They anticipate business and consumer loan volumes increasing further, but they expect some slowing in residential mortgage lending activity.

Real Estate and Construction
Commercial real estate firms in the Third District reported that leasing activity increased recently as many office tenants renewed expiring leases. However, there has been no increase in space rented. The overall office vacancy rate actually rose slightly in most parts of the District as new buildings came on-line. Most of the increased vacancies have been in older buildings as a large number of companies have moved into new buildings. The vacancy rate in the Philadelphia central business district edged up to around 14 percent, and the suburban vacancy rate remained above 20 percent. Commercial real estate firms expect construction activity to slow as a number of new buildings are completed this year. They also expect the additional space to keep vacancy rates from dropping quickly. Industrial building vacancy rates and rents have been nearly steady. There are signs of increased demand for industrial space, especially for warehouse and distribution facilities, but commercial real estate firms forecast only a minimal amount of new construction this year.

Residential real estate agents and homebuilders indicated that sales have been roughly steady in recent weeks and above the pace during the same time last year. Price appreciation appears to be steady, although some real estate agents noted that homes are now taking longer to sell than they did earlier in the year. Both builders and real estate agents expect sales to continue near the current pace unless mortgage interest rates move up significantly. Several contacts speculated that a 100 basis point rise would seriously slow home sales.

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Last update: June 16, 2004