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Federal Reserve Districts

Third District--Philadelphia

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Economic activity moved up somewhat in the Third District since the last Beige Book, on balance, although the advance did not include all sectors. Manufacturers, on balance, reported increases in shipments and new orders. Retailers generally posted gains from February to March. Motor vehicle dealers indicated that sales increased. Third District banks reported steady to slightly decreased loan volume outstanding. Residential real estate agents and homebuilders said home sales increased from February to March. Nonresidential real estate leasing and construction activity continued to be weak, but contacts reported some increase in purchase and investment activity. Business firms in the region indicated that prices of most goods and services have been steady, although there were increased reports of rising prices for basic materials and construction-related products.

The outlook among Third District business contacts is that business activity will continue to move up slowly in most sectors in the months ahead. Manufacturers forecast a rise in shipments and orders during the next six months, on balance. Retailers expect sales to expand modestly as consumer confidence is slowly restored. Auto dealers expect the sales rate to remain above last year's pace. Bankers expect slight increases in lending. Residential real estate contacts expect home sales to rise somewhat during the balance of the year, but they are unsure of the immediate trend after the expiration of the federal tax credit for homebuyers. Contacts in nonresidential real estate expect leasing to advance slightly as tenants take advantage of concessions and lower rents, but they do not expect much growth in demand for commercial space until firms begin to add workers in substantial numbers.

Third District manufacturers reported increases in shipments and new orders in March, on balance, although the number of firms recording gains was not as large as it was in February. However, most of the major manufacturing industries in the region posted net increases. In general, manufacturers indicated that demand for their products was picking up slowly. One said, "Business is better than a year ago, but not exciting," and another said, "There is a slow, steady gain."

Third District manufacturers who were queried in March expect business conditions to improve during the next six months, on balance, and the level of optimism has been practically unchanged from last month. Among the firms surveyed in March, about half expect increases in new orders and shipments; about one-tenth expect decreases. Capital spending plans among area manufacturers remain positive, on balance, but have weakened since the last Beige Book. About one-fifth of the firms polled in March plan to increase expenditures for new plant and equipment, although two-thirds plan to maintain level spending.

Third District retailers reported slight gains in sales in March compared with February and with March of last year. They generally indicated that spring apparel sales were moving up in line with expectations. Some retailers also noted that sales of housewares and home furnishings had risen recently, and one store executive said this increase "shows consumers are more willing to spend, although they are still being cautious." Looking ahead, Third District retailers expect modest year-over-year increases in sales for the spring season, although they point out that the gain will be from a low sales level a year ago.

Third District auto dealers reported an improved pace of sales in March compared with February. They said inventories remained well under control. Dealers expect sales to continue to move up through the spring, and they also anticipate that some domestic franchises that had been discontinued will be restored in the months ahead. In general, dealers are maintaining their expectations that total sales for this year will be slightly ahead of last year.

Total outstanding loan volume at most of the Third District banks contacted for this report has been level or has declined slightly since the last Beige Book. On balance, commercial bank lending officers said there has been a small increase in consumer lending, although some bankers noted an increase in paydowns and payoffs. Bankers generally reported declines in most other credit categories. Most of the surveyed banks indicated that credit quality measures showed little change since the last Beige Book.

Looking ahead, Third District bankers expect some growth in lending. They expect gains in consumer lending and lending to businesses. Several bankers indicated they plan to step up business lending, but only to borrowers "with a sound income stream," as one contact said. Some bankers also said they expected commercial real estate lending and lending for construction to begin to rise. Bankers noted that commercial real estate funding by both banks and nonbank financial institutions was starting to become more available.

Real Estate and Construction
Sales of new and existing homes picked up somewhat in March after falling in February. Sales continued to be stronger in the lower- and moderate-price segments of the market for both new and existing homes. Real estate agents said the inventory of homes listed for sale remained elevated, and sales prices have been steady or declining across the region. Local real estate agents and homebuilders said it was difficult to determine whether the recent increase in sales was the result of buyers signing contracts to take advantage of the federal tax credit before its April expiration or whether the upturn reflected a more fundamental seasonal increase. However, the general view among Third District real estate contacts is that any improvement in home sales during the rest of the year will be modest. As one contact commented, "We have hit the bottom, but now people are only going to buy if they need to."

Nonresidential real estate firms indicated that leasing and construction activity remained slow. Contacts reported that vacancy rates have been about steady for most types of commercial property since the last Beige Book, although vacancy rates for some retail centers have risen. Effective rents continued to be under downward pressure as landlords make concessions to keep existing tenants and attract new ones. Contacts expect nonresidential real estate markets to remain weak as long as tenants are unwilling to expand. One contact said, "The office market will suffer until employment returns to more normal levels." However, some contacts said they believe investor interest in purchasing or financing commercial property was beginning to increase because expected returns to real estate investment appeared to be rising relative to other investment classes. Additionally, some contacts noted that the decline in property values in the past year has prompted some tenants to purchase the buildings they occupy.

Reports on input costs and output prices have been mixed since the last Beige Book. Around one-third of the manufacturing firms polled in March noted increases in the costs of the commodities they use, and around two-thirds reported steady input costs. Most continued to report that they have not raised the prices of the products they make, although some producers of food products and metals have raised prices. Construction firms noted recent increases in the costs of lumber, drywall, metal products, oil-based products, and some glass products. Retailers reported mostly flat selling prices.

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Last update: April 14, 2010