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Federal Reserve Districts

Third District--Philadelphia

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Economic conditions in the Third District have been mixed since the last Beige Book. Manufacturers, on balance, reported a modest increase in shipments and new orders. Retailers indicated that sales increased marginally for the holiday shopping period compared with a year ago. Motor vehicle dealers indicated that sales have improved slightly. Third District banks continued to report decreases in loan volume outstanding and further declines in credit quality. Residential real estate agents and home builders said sales were seasonally slow in December following an increase in November. Nonresidential real estate leasing, purchase, and construction activity continued to decline. Business firms in the region indicated that prices of most goods and services have been steady, although reports of higher commodity prices have become more widespread since the last Beige Book.

The consensus among Third District business contacts is that business conditions will improve slowly in most sectors during the first half of 2010. Manufacturers forecast a rise in shipments and orders during the next six months, on balance. Retailers expect sales to rise if overall economic conditions improve. Auto dealers expect sales in 2010 to be somewhat above the level in 2009. Bankers expect demand for credit to pick up by mid-year. Residential real estate contacts believe housing demand will rise as spring approaches. In contrast, contacts in nonresidential real estate expect leasing and construction to remain weak through most of the year.

Third District manufacturers reported increases in shipments and new orders, on balance, from November to December, although the number of firms posting gains did not exceed the number recording declines by a wide margin. Makers of food products, furniture, and chemicals noted increased demand for their products. Declines in demand were reported from most of the other major manufacturing sectors in the District. Firms reporting increases in orders generally indicated that the gains have been slight. One said that "business is getting a little better, but nothing to write home about," and another said that "we're keeping busy but it's hand to mouth; there's no backlog."

Third District manufacturers expect business conditions to improve during the next six months, on balance. Among the firms polled in December, about four-tenths expect new orders and shipments to increase during the first half of the year; about two-tenths expect decreases. Several firms noted that the outlook for future taxes, health-care regulations, and energy costs were negatively affecting their expectations as well as those of their customers. Although the area manufacturers planning to increase capital spending outnumber those planning to decrease capital spending, the positive ratio has not increased since the last Beige Book.

Third District retailers reported marginal year-over-year increases in sales, on balance, for December. A snowstorm on the weekend before Christmas curtailed shopping, and many stores closed. However, many stores were open for extended hours in the four days before Christmas, and several retailers estimated that they recouped sales lost on the weekend. Several Third District retailers noted that the sales improvement for the 2009 holiday period compared with 2008 did not represent a significant shift in the sales trend. Poor results in 2008 made a gain for 2009 easier, according to this view. Looking ahead, store executives say sales will increase significantly only if employment and financial conditions improve.

Some Third District auto dealers reported improvement in sales in December, although, for most, sales have been roughly steady. Dealers said financing for buyers has become somewhat more available, helping to support the sales rate. Looking ahead, dealers expect total sales in 2010 to slightly exceed sales in 2009.

Total outstanding loan volume at Third District banks continued to slip in December, according to bankers contacted for this report. Bankers said lending activity has been soft in nearly all major consumer and business credit categories, mainly due to slack demand, although some lenders reported slow growth in their auto lending. Besides low demand, some bankers indicated that overall loan volume was declining because of write-offs. Credit quality remained a concern for Third District bankers. Although most of those contacted for this report said delinquencies and defaults have been rising less rapidly recently than they had through most of 2009, bankers expect charge-offs to remain high for some time.

Looking ahead, Third District bankers see slow loan growth starting around mid-year as the economy recovers and loan demand picks up. Until then they expect write-offs and the continuation of stringent credit standards to limit expansion in lending. One banker said that "standards of lower loan-to-value ratios and higher credit scores are being maintained and that will limit loan growth," and another said that "we are focused on preserving capital and minimizing future losses."

Real Estate and Construction
Sales of new and existing homes were seasonally slow in December after a gain from October to November, according to local real estate agents and home builders. Real estate agents said the number of homes listed for sale remained high relative to the sales rate, and average selling prices continued to fall. Most of the real estate agents surveyed for this report characterized the market as "stabilizing" or "hitting the bottom." They expect sales to rise in the spring with a boost from the extended home-buyer federal tax credit. However, they do not expect sales prices to begin to move up with the expected increase in sales. Most agreed with the opinion expressed by one agent that "prices might begin to stabilize in 2010."

Nonresidential real estate firms indicated that leasing, purchase, and construction activity continued to decline as 2009 came to a close. They also reported that vacancy rates remained on the rise. Contacts said that building owners have been reducing rents as leases come due for renewals, and tenants have been generally renewing leases for less space and shorter terms. One contact said that "slower general business activity has resulted in many properties not generating cash flow. They are not worth the same amount of money they were worth a few years ago." According to this contact, recent and prospective declines in commercial property values have induced many property owners to withhold them from the market and have deterred many buyers from making purchases. Contacts expect nonresidential real estate markets to remain weak through most of 2010.

Reports on input costs and output prices have been mixed since the last Beige Book. The number of manufacturing firms noting increases for the commodities they use has risen, but most continued to report that they have not raised the prices of the products they make. Retailers have generally kept their selling prices steady, although discounts became more common toward the end of the holiday shopping period. Business firms in all sectors expect increases in energy costs and some commodity prices during 2010.

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Last update: January 13, 2010