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Federal Reserve Districts

Third District--Philadelphia

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Economic activity in the Third District increased in September, but conditions varied by sector, and overall growth appears to have slowed. Manufacturing in the District edged down from August to September. Retail sales of general merchandise rose, but auto sales remained sluggish. Bank lending increased overall, although mortgage lending declined. Service-sector activity continued to increase, but the pace of growth has eased since midsummer.

Third District business contacts generally expect business activity in the region to continue to expand but at a slow pace. Manufacturers expect improvement but do not anticipate strong gains. Retailers forecast a modest growth in sales; however, auto dealers do not expect sales to pick up. Bankers expect a further decline in mortgage lending and slight gains in business and consumer lending. Service-sector firms expect business to continue to move up slowly.

Third District manufacturers reported a lower level of activity in September than in August. Around one-third of the companies surveyed noted declines in shipments and one-fourth noted increases. New orders were level, on balance, with an equal number of respondents reporting increases, decreases, and steady orders. Demand increased in September for wood, paper, plastic, and metal products, but fell for textiles, chemicals, and industrial materials and equipment. Area manufacturers reported a slight decline in order backlogs and no change in delivery times.

Overall, manufacturers expect demand for their products to improve, but their outlook is not as optimistic as it was earlier this year. Among the manufacturers contacted in September, slightly more than one-third expect their shipments and orders to increase during the next six months, and about one-fourth expect decreases. Capital spending plans reported by Third District manufacturers in September rose somewhat from August. On balance, however, it appears that fewer firms are scheduling increased outlays for 2007 than planned increases for 2006.

Most of the retailers contacted for this report indicated that sales have increased in recent weeks. Although the seasonal upturn due to back-to-school sales started slowly, sales improved through the period, and many of the retailers surveyed in September noted that they achieved year-over-year increases in excess of their expectations. The gains were fairly widespread among lines of merchandise and types of stores. Merchants did note, however, that promotional efforts were extensive. Looking ahead, area retailers are uncertain whether the recent pace of growth will be sustained. They say consumer confidence is fragile, and that shoppers’ willingness to spend will depend crucially on the course of gasoline prices and the stability of housing values.

Auto sales in the region remained sluggish in September. Dealers said domestic manufacturers’ incentives have done little to boost sales. Production cutbacks have helped area dealers keep inventories manageable, although the number of light trucks on dealers’ lots is still high. Auto dealers in the region do not anticipate an improvement in sales in the near future. There has been an increase in the number of dealerships closing in the past few months, especially smaller ones.

The volume of loans outstanding at Third District banks rose moderately in September, according to commercial bank lending officers contacted for this report. Commercial and industrial lending increased for most banks. Credit card lending expanded at a steady rate, but growth in other types of personal lending slowed. Demand for residential mortgages eased. And while overall credit quality was good, according to bankers contacted for this report, some noted increased delinquencies on residential mortgages, and some said the average creditworthiness of applicants for mortgages and consumer loans has declined recently.

Bankers in the District expect business and consumer lending to increase in the months ahead, but not strongly. They also expect gains in credit card lending. However, they anticipate a further decline in the demand for residential mortgages. Some bankers also said they expect an increase in mortgage delinquencies as payments of principal start to become due on non-amortizing mortgages and as rates rise on adjustable-rate mortgages.

Most of the Third District service firms contacted in September reported that activity was increasing, but for many firms growth has slowed recently. Business services firms generally indicated that they have experienced slower growth in work done for existing client firms and a slower pace of new client acquisition. Trucking firms reported significant slowdowns in the rate at which their business has been growing. Information technology firms have generally reported steady growth in the past few months. Employment agencies and temporary help firms reported that demand for workers has been rising at a nearly steady pace. Service-sector firms expect business to continue to advance, but they expect growth to remain slow, at best, in the months ahead.

Prices and Wages
Business firms in the Third District noted increases in the costs of raw materials and intermediate goods, although reports of price increases were not as widespread in September as they were earlier in the year. Manufacturers noted continued increases in prices for metals and energy. However, retailers generally indicated that selling prices have not been rising significantly, and they noted that discounting was widespread during the back-to-school shopping period.

Employers in many industries reported that labor markets remain tight for skilled workers, but the availability of unskilled workers has increased somewhat. In service industries, firms report rising hiring rates and turnover among some occupational specialties, especially in information technology. Area employers indicated that wages have been rising slightly faster than at this time last year, but the rate of increase has not accelerated in recent months.

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Last update: October 12, 2006