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Federal Reserve Districts

Third District--Philadelphia

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Business conditions in the Third District remained soft in December. Manufacturers, on balance, reported declines in shipments and new orders. Retailers indicated that sales were far below the level of a year ago, and motor vehicle dealers reported continued sluggishness in sales. Bank loan volume rose slightly in December, but credit quality continued to deteriorate. Residential real estate sales and construction remained on a declining trend. Commercial real estate investment and construction activity continued to be slow. Service sector activity generally declined during December. Business firms in the region reported decreases in input costs and output prices in December, and retailers made extensive markdowns for the holiday shopping period.

The outlook among Third District businesses is generally pessimistic. Manufacturers forecast decreases in shipments and orders during the next six months. Retailers expect a slow sales pace during the winter. Auto dealers do not expect much improvement in sales. Bankers anticipate slow loan growth during the year. Residential real estate agents and home builders expect sales to remain slow at least until mid-year and possibly longer. Contacts in commercial real estate expect leasing and construction activity to remain at low levels until overall economic conditions improve. Service sector firms expect activity in 2009 to be slower than in 2008.

Third District manufacturers reported continuing declines in shipments and new orders, on balance, from November to December. Nearly one-half of the manufacturers surveyed noted decreases in those measures, and around one-fourth reported increases. Reports of declining demand exceeded reports of rising demand in all the major manufacturing sectors in the region except food processing. The drop in orders continued to be especially large for firms that manufacture construction-related goods and materials and business and industrial equipment. One maker of industrial machinery said, "Customer capital budgets are being dramatically reduced," and several producers of metal products noted order cutbacks and extensions of delivery dates by customers.

The outlook among Third District manufacturers remains generally pessimistic. Among firms polled in December, a little more than one-third expect new orders and shipments to decline during the next six months, and less than one-third expect increases. Area manufacturers continued to cut capital spending plans, and the number of firms planning to reduce future outlays increased from November to December.

Third District retailers generally reported year-to-year declines in sales in December. Customer traffic and sales were generally far below year-ago levels despite several days of extended opening hours and widespread discounting during the month. Sales of jewelry and apparel were especially weak, according to retail contacts. They also said that discount stores were generally the only retailers that achieved year-to-year increases in sales. Despite the disappointing results, most stores were not left with excessive inventories. Discounting early in the season shifted sales to early December and reduced the amount of post-Christmas buying, but conservative stocking by stores generally resulted in "a little less merchandise on the shelves on December 26," according to one store executive. The outlook among the region's retailers is not positive. Many anticipate a prolonged period of retrenchment by consumers, and they expect a significant number of retail firms to close some of their stores or cease operations entirely during 2009.

Third District auto dealers reported a continuing slow rate of sales in December. They said a reduction in financing for car purchases was seriously limiting sales. Dealers also reported difficulty obtaining inventory financing. Looking ahead, they expect some improvement in sales if banks and finance companies increase financing for car buyers, but they expect more dealers to go out of business unless sales move up significantly from the recent pace.

Total outstanding loan volume at Third District banks rose slowly in December, according to bankers contacted for this report. There have been gains in real estate loans and consumer credit but no growth in business lending. One banker noted that "Companies are shrinking operations and need less financing." Other bankers said that consolidation among large banks with branches in the region has been attended by a slowdown in those institutions' business loan marketing efforts. Most of the banks contacted for this report said that credit quality continued to decline for both business and personal loans. Banks polled in December generally reported steady deposit growth and adequate liquidity. Looking ahead, bankers expect slow expansion in lending in 2009, although some said growth in lending could get a boost from new relationships with firms and nonprofit entities that are turning to banks in lieu of capital markets for funding.

Real Estate and Construction
Residential real estate activity in the Third District continues to weaken. Residential real estate agents and builders reported that sales remained on a downward trend. Although the number of homes for sale has edged down, time on market has increased. Real estate agents noted that many prospective buyers are making low bids for houses and asking for further price reductions after signing sales agreements. One agent said that "We are seeing a lot of sellers renting their homes because they are not prepared to accept what buyers are willing to offer." In general, real estate agents said average selling prices continued to fall in most parts of the region, and that price declines have been more widespread in the higher price ranges. Builders and agents expect current market conditions to persist at least until the spring, and many believe improvement might not take hold until 2010.

Commercial real estate firms indicated that construction, leasing, and purchase activity continue to fall, and project postponements continue to be announced, especially for retail-oriented development. Although some new office and hotel projects have been proposed in the region, contacts do not expect commercial real estate investment and construction activity to pick up until general economic conditions improve and tenants commit to occupy new buildings.

Service sector firms generally reported lower levels of activity in December compared with November. Some business services firms indicated that their client firms were reducing their use of outsourced services because their own activity has slowed and as part of their general efforts to reduce operating expenses, especially for non-essential functions. Business and professional service firms noted that prospective clients are increasingly focused on immediate cost-reducing or revenue-enhancing benefits of purchased services. Firms providing many types of personal services reported slower business and declining revenue as a result of declines in both the number and dollar value of transactions. The outlook among area service firms has weakened since the last Beige Book, and several of those contacted for this report are planning for reduced activity in 2009.

Reports on input costs and output prices indicate a further general decline since the previous Beige Book. Manufacturing firms continued to note decreases in commodity prices for the materials they use, and a growing number have reduced the prices of their own products. Retailers generally reported steep markdowns for the holiday sales season, and many implemented further discounting in the days after Christmas.

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Last update: January 14, 2009