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Federal Reserve Districts

Third District--Philadelphia

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Economic conditions in the Third District remained subdued in July. Manufacturers, on balance, reported declines in shipments and new orders. Retailers gave mixed reports, although sales were not strong overall. Motor vehicle dealers indicated that sales of new vehicles were slow. Bank loan volume has increased slightly. Credit quality has continued to deteriorate. Residential real estate sales increased in June and July as pent-up demand and seasonal factors boosted sales, according to local real estate agents, but the sales rate remained below the year-ago pace. Nonresidential real estate investment, leasing, and construction activity continued to be slow. Business firms in the region reported level or falling input costs and output prices in July.

The outlook in the Third District business community was slightly more positive in July than at the time of the previous Beige Book, although most contacts see little prospect of strong improvement in the immediate future. Manufacturers forecast a rise in shipments and orders during the next six months. Retailers expect sales to gain strength slowly, but auto dealers expect sales to remain slow for the rest of the year. Bankers anticipate demand for credit to remain limited until overall economic conditions improve, and they expect further weakening in credit quality as well. Residential real estate contacts believe housing demand is stabilizing, although they say a substantial increase in sales is not imminent. Contacts in nonresidential real estate expect leasing and purchase activity to remain weak during the rest of this year and perhaps move up early next year.

Third District manufacturers reported declines in shipments and new orders, on balance, from June to July. A bit more than one-fourth of the manufacturers surveyed noted decreases in both measures, and slightly less than one-fourth reported increases. Demand remains weak for the products of most of the District's major manufacturing sectors, although producers of some industrial materials and products noted slight increases in orders from June to July.

The outlook among Third District manufacturers is positive. Among firms polled in July, around one-half expect new orders and shipments to increase during the next six months; less than one-tenth expect decreases. However, several of the manufacturers surveyed in July said they expect the pickup in business to be uneven. Typical comments were that that markets are mixed with "areas of strength and areas of weakness," and that improvement is likely to be "slight" or "spotty."

Consumer Spending
Third District retailers gave mixed reports on sales in June and July, but on balance sales were not strong. Discount stores continued to have better results than other stores. Business at restaurants, hotels, and other leisure and hospitality establishments remained slow. Retailers said consumer confidence continues to be fragile, limiting consumers' willingness to spend. The remark of one retailer, that "Customers are keeping a more watchful eye on how they spend their money," was seconded by many other merchants. More positively, home improvement contractors reported fairly good increases in demand for weatherization and energy-efficiency products and home alterations as consumers take advantage of federal tax credits for these items. Looking ahead, retailers are apprehensive that consumer caution will extend into the back-to-school shopping period, although some believe a slow trend toward strengthening sales could begin when there is evidence that the recession is bottoming out.

Third District auto dealers reported that sales of new vehicles remained slow in July but sales of used vehicles have increased recently. Dealers continue to cope with closings and consolidations, and several are emphasizing vehicle servicing in order to maintain income. Looking ahead, dealers said a return of consumer confidence is a prerequisite for a solid increase in demand for new vehicles.

Total outstanding loan volume at Third District banks has been moving up very slowly in recent weeks, according to bankers contacted for this report. There have been slight gains in consumer, business, and residential real estate lending. Most of the bankers contacted for this report said the slowness in loan growth was a result of restrained loan demand, although some noted that they were limiting business lending, especially in the retail, hospitality, and multi-family residential sectors. Nevertheless, banks in the District do not appear to have imposed overall lending restrictions, and--as one banker said--"good credits are still getting money." Most of the banks contacted in July said that credit quality continued to deteriorate for all categories of lending. Some lending institutions noted increased losses on defaulted mortgages as a result of declines in house prices. Bankers generally expect demand for credit to remain slack in the near term, and some said a significant upturn in lending will not occur until there are solid indications of overall improvement in economic conditions.

Non-depository lenders in the District said financing remains tight, especially for commercial real estate. They noted that many borrowers facing loan rollovers are having difficulty replacing loans. Contacts in secondary debt markets are generally of the opinion that large-scale financial restructuring over an extended period will be required to counter the decline in securitization the has occurred since the onset of the current recession.

Real Estate and Construction
Residential real estate activity in the Third District in June and July remained well below the level of a year ago, although residential real estate contacts reported a noticeable pickup from earlier months of the year. According to real estate agents the increase is partly seasonal and partly the effect of "pent-up demand" rebounding from the very low pace of sales over the past winter. Real estate agents generally indicated that the improvement in sales has been mainly for relatively lower-priced houses. They say a wider upturn in sales will depend on significant improvement in consumer confidence and employment. Real estate agents said price declines appear to be easing, although in some parts of the District prices continued to drop substantially compared with a year ago.

Nonresidential real estate firms indicated that leasing and purchase activity has remained slow. Vacancy rates have risen in office, industrial, and retail buildings. Rents have moved down and landlord concessions have increased. Several contacts echoed the comment of one who said, "The balance of power has moved back toward the tenant." Contacts also indicated that financing for commercial construction and investment remained very difficult. Contacts expect nonresidential real estate leasing and construction activity to remain weak for the next two quarters, at least, but several noted that the lack of new buildings coming on line this year could move markets closer to balance in early 2010.

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. Retailers indicated that their cost of goods has been about steady, and they have kept selling prices nearly level. Several contacts in service industries, especially those related to real estate and construction, said they have reduced fees recently.

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Last update: July 29, 2009