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Federal Reserve Districts

Third District--Philadelphia

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Economic conditions in the Third District improved marginally in March and early April. Manufacturers reported slight increases in shipments but only steady orders. Retail sales of general merchandise rose, boosted by the early Easter and warm weather in March. Auto sales also picked up somewhat. Bank lending rose moderately. Service-sector firms generally reported continued growth, although several indicated that the pace of expansion has eased recently. Third District business contacts reported more instances of price increases in March than they did in February. Most of the firms reporting on labor costs indicated that wages continued to increase at a moderate, steady rate. Employers said benefit costs were also rising; some said the increase has been steady, and others said the increases so far this year have exceeded last year's increases.

Third District business contacts generally expect business activity to continue to expand at a modest pace. Manufacturers expect demand for their products to increase. Retailers expect continued expansion in sales, although at a slower rate. Auto dealers do not anticipate much improvement. Bankers expect business and consumer lending to remain on the rise, but they do not anticipate a strengthening in mortgage lending. Service-sector firms forecast continued gains in activity, although some believe the pace of growth could ease.


Third District manufacturers reported a slight increase in shipments from February to March. However, they indicated that new orders were only steady month to month and order backlogs fell. The weakness in orders was fairly widespread among the region's major manufacturing industries, although some makers of industrial materials and equipment noted increased demand for their products. Capital spending plans picked up somewhat in March, with increases scheduled in a broad range of manufacturing industries.

Looking ahead, Third District manufacturers expect modest increases in demand for their products. Among the manufacturers contacted in March, around 40 percent expect their shipments and orders to rise during the next six months; just under 20 percent expect decreases. The outlook for improved business is fairly widespread among the major manufacturing sectors in the region, although makers of transportation equipment anticipate further declines.


Third District retailers generally reported year-over-year sales increases in March. The early Easter holiday boosted the annual gain, as did warm weather that prompted sales of spring apparel. However, several of the store executives contacted for this report said they believe the underlying sales trend is not as strong as the March results suggest. They believe consumers are growing more cautious in their spending in response to rising gasoline prices, the slowdown in house price appreciation, and general concerns about overall economic conditions. Retailers expect sales growth to ease in April, following the Easter surge in March, and they are cautious in their outlook for the rest of the spring.

Auto sales improved somewhat in late March and early April, although they remained below sales during the same period a year ago. Inventories have been reduced in recent weeks, but many dealers indicated that their inventories were still above desired levels. In general, dealers in the region said they do not expect sales to improve significantly; they also thought uncertainty about possible corporate changes among auto manufacturers was dampening the current sales rate.


The volume of loans outstanding at Third District banks rose moderately in March, according to commercial bank lending officers contacted for this report. Commercial and industrial lending edged up, and personal lending rose modestly. Demand for residential mortgages was nearly flat. Some bankers noted that consumers were shifting from variable-rate home-equity lines to fixed-rate home-equity loans.

Bankers in the District expect business and consumer lending to increase gradually in the next few months. However, they noted that both businesses and consumers have become more concerned about economic conditions and appear to be trimming or delaying plans to increase borrowing.


Most of the Third District service firms contacted for this report indicated that activity remained on the rise, although several said that growth has slowed recently. Business services firms reported growth, but several noted that revenue gains have not matched expectations because business from existing customers has not increased as much as anticipated. Employment agencies and temporary help firms reported that demand for workers has been rising, although hiring plans have moderated in some parts of the District. Service-sector firms generally expect business to continue to increase in the months ahead, although some are concerned that growth could be slower than they had expected at the beginning of the year.

Prices and Wages

Reports of increases in the costs of raw materials and other inputs from Third District businesses were somewhat more widespread in March than in February. Manufacturers noted increases in prices for metals, plastics, industrial equipment, paper products, and electricity. Retailers and service firms also reported price increases for energy. Retailers said costs of goods and selling prices have not changed much in the past few months.

Firms reporting on employment costs in March noted a generally steady trend of moderate wage increases. They indicated that benefit costs were also rising. Some firms reported steady increases; others noted that the increases this year have been greater than last year's. Labor availability was generally described as adequate, although employers in some parts of the region said they have had recent job openings that have taken longer to fill than they had expected.

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Last update: April 25, 2007