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Federal Reserve Districts

Third District--Philadelphia

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Business activity in the Third District increased in February. Manufacturers reported rises in orders and shipments during the month. Retail sales of general merchandise were up modestly compared with the previous month and with February of 2004. Auto sales rose slightly from January to February but remained below last year's level. Banks and other lending institutions reported that lending continued on an upward trend. Commercial real estate contacts described market conditions as steady. Residential real estate agents indicated that existing home sales were running at a roughly steady pace, with continuing price appreciation. Homebuilders generally reported a pickup in sales in February after a slowdown in December and January.

Contacts in the Third District business community generally expect further improvement in the region's economy in the months ahead. Increases in shipments and orders are expected by manufacturers during the next six months. Retailers anticipate moderate year-over-year gains during the spring sales season, but auto dealers say the outlook is uncertain. Bankers forecast a continued rise in overall lending, with gains in business and home equity lending. Commercial real estate companies expect market conditions to improve during the year. Residential real estate agents foresee a pickup in home sales during the spring, but they expect sales for the year as whole to be somewhat below last year.

Manufacturing activity in the Third District increased in February. Around four in ten of the manufacturing firms surveyed during the month reported an increase in shipments compared with January, and around one in three reported higher orders; around two in ten reported decreases in these measures. Order backlogs at area plants were virtually unchanged from January to February, but delivery times increased somewhat. Growing business was reported among firms in most of the District's major manufacturing industries.

The region's manufacturers generally expect further gains in business activity. Nearly half of the firms surveyed in February expect their shipments and orders to increase during the next six months, and slightly more than one in ten expect decreases. On balance, area manufacturing firms are scheduling increases in capital spending and planning to add employees.

Third District manufacturers reported rising prices in February. The number of firms reporting increases in input prices declined from January to February, but the number raising prices for their own products in February was the same as in January. During the next six months almost two-thirds of manufacturers expect increases in input prices, and nearly one-half expect increases in the prices of their own goods. This represents a more widespread expectation of higher prices than in January.

Retailers reported moderately increased sales in February compared with January and with February of last year. Store executives indicated that winter merchandise has been mostly cleared out through discounting and that spring apparel was selling well. Most of those contacted for this report said sales in recent weeks have been running close to plan, although inventories have increased as spring merchandise shipments have been received. Store executives generally forecast a modest year-over-year increase in sales for the spring selling season. Most of the retailers surveyed said costs of goods have been practically unchanged recently, but some expect increases for fall merchandise. Store officials noted continuing increases in costs for employee benefits.

Auto dealers in the region reported a slight pickup in sales in February compared with January, although the sales rate remained below the rate in the same months in 2004. Inventories were described as high, except for some imported models. Most of the dealers polled in late February said the immediate sales outlook was uncertain, although they anticipate sales for this year as whole will be down from last year.

Outstanding loan volume at Third District banks rose in February compared with January, according to banks surveyed for this report. Nonbank lending institutions also reported growing loan volumes. Commercial and industrial loans have been increasing, with new borrowing being done by firms in a wide range of industries. Bankers also reported increases in personal loans, especially home equity loans and credit lines. Bankers and other lenders in the District expect overall lending to rise through the year, with further gains mainly in business and home equity lending.

Real Estate and Construction
Commercial real estate firms in the Third District reported that vacancy rates in the region's office markets have been roughly steady, on balance, in the past few months. There have been slight increases in some areas, including Philadelphia's central business district, and slight decreases in other areas. Rental rates have also been mixed, although recent changes have been mostly slight. Commercial real estate firms expect office vacancy rates to move down through the year in most parts of the region as economic activity and hiring expand. Industrial building vacancy rates have declined slightly in recent months, but rents have been nearly steady. Commercial real estate contacts noted an increase in speculative construction of warehouse and other industrial buildings, which they believe reflects optimism among developers that regional economic conditions are improving.

Residential real estate agents indicated that sales have been roughly steady in recent weeks at a strong pace. Homebuilders reported a pickup in sales in February after a slowdown in December and January. House prices continue to appreciate, but some real estate agents noted that increased asking prices for homes in the highest price range have resulted in a slower sales rate. Both builders and real estate agents expect the pace of sales to accelerate somewhat as spring approaches, although they anticipate sales for the year as a whole will be slightly below last year.

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Last update: March 9, 2005