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Federal Reserve Districts

Third District--Philadelphia

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Economic activity in the Third District continued at a slow rate in March. Manufacturers, on balance, reported declines in shipments and new orders. Retailers indicated that sales were nearly steady but well below the level of a year ago. Motor vehicle dealers reported a nearly steady but low rate of sales during the month. Bank loan volume has been flat in recent weeks, and credit quality has continued to deteriorate. Residential real estate sales were slow but appeared to be close to steady. Nonresidential real estate investment and construction activity continued to decline. Service-sector activity has been generally slow in recent weeks. Business firms in the region reported level or falling input costs and output prices in March.

The outlook in most industries in the Third District is subdued. Manufacturers forecast some gains in shipments and orders during the next six months, but little improvement is expected in other sectors. Retailers expect sales to remain near the current pace through spring, and auto dealers expect sales to remain around the current rate for most of the rest of the year. Bankers anticipate little growth in lending until both business and consumer confidence is restored. Residential real estate agents and home builders expect sales to remain near the current rate or to pick up slightly through the spring and summer. Contacts in nonresidential real estate expect leasing and purchase activity to remain weak through the rest of the year. Service-sector firms expect activity to be slow during the next few months, at least.

Third District manufacturers reported further declines in shipments and new orders, on balance, from February to March. Around one-half of the manufacturers surveyed noted decreases in both measures, and around one-tenth reported increases. Among the District's major manufacturing sectors demand remains especially weak for primary metals, industrial machinery, electrical equipment, and measuring and testing equipment. Several firms in these sectors noted that demand for products related to autos or housing ranged from "weak" to "horrible." In contrast, makers of food products, furniture, and some fabricated metal products have had recent increases in orders.

The outlook among Third District manufacturers is slightly positive, although fewer forecasted improvement when recently surveyed than did so at the time of the previous Beige Book. Among firms polled in March, around one-third expect new orders and shipments to increase during the next six months and around one-quarter expect decreases. On balance, area manufacturers continue to report that they will be reducing capital spending during the next six months.

Third District retailers generally reported nearly steady sales during March at a rate that remained well below the year-ago pace. Some stores reported slight gains in sales of low-priced household items and apparel during March, but for most stores and most lines of merchandise, there was little change in the sales rate from February. Store executives said consumers remain cautious and cost-conscious. As one retailer described consumer demand, "Customers are going to value. They are buying lower-priced products even when the high-end products go on sale." Retailers contacted for this report generally do not expect much change in sales in the next few months. Some believe the sales pace could stabilize during the spring. However, several noted that sales varied greatly week to week during the winter, so a sustained period of firming sales would be required as an indication that consumer spending was poised for a rebound.

Third District auto dealers reported that sales remained very weak in March. Dealers said the availability of financing for car purchases continued to limit sales, especially for domestic makes that do not have support from manufacturers' finance companies. Dealers also reported continued difficulty in obtaining inventory financing. Looking ahead, dealers see no sign of an upturn until consumer confidence is restored and financial conditions improve.

Total outstanding loan volume at Third District banks has been virtually flat in recent weeks, according to bankers contacted for this report. A small increase in consumer credit has been offset by decreases in commercial and industrial lending and residential mortgages. Commercial bank lending officers indicated that many business firms were reducing outstanding borrowing. "They're cutting inventory and postponing expansion, and paying down their lines," one banker said. A falloff in merger and acquisition activity was also cited as a reason for the declining demand for business loans. Business contacts said lending to businesses by non-depository financial institutions remained limited, especially for real estate and retail sector borrowers. Most of the banks contacted for this report said that credit quality continued to deteriorate for all categories of lending. Bankers generally expect demand for credit to remain subdued for the rest of the year. They say businesses will be reluctant to expand and consumers will be wary of adding to their indebtedness until economic conditions improve.

Real Estate and Construction
Residential real estate activity in the Third District remained slow in March. Residential real estate agents and builders reported that sales have been nearly steady at a slow pace, and the inventory of unsold new and existing homes has been practically unchanged. However, both builders and real estate agents noted a recent increase in the number of people looking at homes. Although they said the increase appeared to be mostly seasonal, several said the growing number of potential buyers could signal a bottom to the cyclical decline in sales. Builders and real estate agents characterized current sales as "bouncing along the bottom" or "stabilizing."

Prices of both new and existing homes in the region continued to fall, but contacts said the rate of decline appeared to be easing. Builders continued to offer substantial incentives to purchasers, and larger firms continued to provide low-rate mortgages to some buyers. Builders and agents expect sales to remain at a relatively slow pace through most of this year even if there is a slight pickup through the spring and summer. Most of those contacted for this report do not expect significant improvement until the spring of next year.

Nonresidential real estate firms indicated that construction, leasing, and purchase activity continued to decline during the first quarter. They also reported that rental rates have been edging down. Many previously announced office, educational, and institutional construction projects have been postponed. Contacts expect nonresidential real estate leasing and construction activity to remain weak through most of the year. However, they said that infrastructure construction would likely increase in the second half as federal stimulus funds are spent, and they believe there could be slight improvement in some office markets in the fourth quarter, if economic conditions stabilize, because several large leases will need to be renewed at that time.

Service-sector firms reported slow activity since the last Beige Book. Firms that provide services to construction, real estate, and finance sectors reported further declines in activity. Several educational institutions and health services firms have also cut back activity in response to either deteriorating financial conditions or to slowing demand. The region's service-sector firms generally anticipate soft conditions to persist for most of the balance of the year.

Prices and Wages
Reports on input costs and output prices indicate mostly steady or falling prices since the last Beige Book. Manufacturing firms noted decreases for most of the materials they use as well as the products they make. However, since the last Beige Book there have been reports from several industry sectors that prices have risen for food products and some metal products. Retailers have reduced prices for many products in a series of promotional efforts, but it is not clear that regular prices are trending down significantly.

Firms in a wide range of industries continued to report salary freezes or reductions and reductions in fringe benefits. A number of private firms have announced hiring freezes and layoffs, and employers in the private sector as well as state and local government have imposed unpaid furloughs.

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Last update: April 15, 2009