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Federal Reserve Districts

Third District--Philadelphia

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Business activity in the Third District has improved overall since the last Beige Book. Manufacturers reported increases in shipments and new orders in March. Retailers achieved slight year-over-year increases in sales in March. Motor vehicle dealers also reported year-over-year sales increases in March. Third District banks reported little overall change in loan volume outstanding since the last Beige Book, although a few reported increased lending on home equity credit lines and growth in small business lending. Residential real estate agents reported some increase in activity since the last Beige Book as measured by inquiries, showings, and traffic, but little pickup in sales or construction. Contacts in the commercial real estate sector said that leasing and construction activity have remained slow since the last Beige Book. Service-sector firms reported some increases in activity. Business contacts reported further price increases for inputs as they did in the previous Beige Book. Output price increases have also been reported in several sectors, but by fewer contacts than for factor prices.

The outlook among Third District business contacts is positive and has strengthened slightly. Manufacturers forecast a broad rise in shipments and orders during the next six months. Retailers expect sales to increase modestly on a year-over-year basis. Bankers expect only slight growth in lending over the next two quarters. Contacts in residential real estate have mixed views, although some expect a pickup in sales of existing homes. Contacts in commercial real estate expect market conditions to improve slowly during the year. Service-sector companies expect continued slow growth through the first half of 2011.

More than half of Third District manufacturers reported increases in shipments and new orders in March -- a stronger response than in February. Producers across a broad spectrum of 13 manufacturing sectors reported increased demand. The strongest reports came out of the fabricated metal products and industrial machinery and equipment sectors. Declines in orders were predominant only among producers of apparel and rubber products. While several manufacturers cited existing customers as the source of increased orders, other sources included new product offerings and expanding international opportunities.

Over two-thirds of Third District manufacturers expect business conditions to improve during the next six months. Among the firms surveyed in March, over 60 percent expect increases in new orders and shipments, and less than 5 percent expect decreases. One supplier of construction industry materials reported receiving contracts extending further out into the fourth quarter. Plans to increase capital spending became more widespread with over one-third of area manufacturers projecting an increase over the next six months.

Third District retailers generally reported slight year-over-year increases in sales in March. One merchant said, "Things are getting a little better, but there is no move to stronger growth." Retailers indicated that sales of furniture and home goods have risen recently, but sales of spring apparel have been slow to pick up, which retailers attributed to unseasonably cold weather and the late Easter date this year. Some retailers said they have experienced shortages of a few goods produced by Japanese companies, mainly electronic products, but as of late March there did not appear to be a widespread interruption of imports of consumer goods from the Far East. Store executives surveyed for this report expect the current modest rate of sales growth to continue through the spring.

Third District auto dealers generally reported that sales were above the year-ago level in March and were continuing to move up. Some dealers of various brands noted the beginning of supply interruptions due to halts of vehicle and parts production in Japan resulting from the earthquake and subsequent problems there. These dealers said the supply problem had not yet become serious, but they did not know how extensive it might become or how long it might last. Dealers reported that demand for large vehicles has not declined yet despite the recent increase in the price of gasoline. Dealers said they see evidence of "pent-up demand" and they expect sales to remain strong as long as economic conditions are improving and the price of gasoline does not rise much higher.

Total outstanding loan volume at most of the Third District banks contacted for this report has shown little change in recent weeks. Some banks in the region reported recent increases in lending extended on home equity credit lines, but other forms of consumer credit have been level or moved down. Some banks reported increases in commercial and industrial loans and some types of commercial real estate loans. One banker said, "We're making more small business loans, and commercial real estate lending is picking up except for retail properties." The outlook among Third District bankers interviewed for this report is that total loan volume will expand slowly this year, as overall economic activity advances, with gains mostly in commercial and industrial and consumer lending, but lending for residential or commercial construction is not expected to increase.

Real Estate and Construction
Residential real estate activity has shown some signs of picking up in most parts of the Third District. Real estate agents reported a recent increase in inquiries from prospective buyers of existing homes. A common comment from agents was that "showings are up." Several agents noted that the inventory of existing homes for sale is below the level of a year ago. Agents expect sales to pick up by the usual seasonal amount this spring, and some said they thought a stronger than usual gain might be attained. However, agents generally expect sales prices to be level with or slightly below prices recorded a year ago. Sales of new homes do not appear to have increased notably in the region, according to local builders. Some contractors reported a rise in remodeling and renovation work, but they also noted that rainy weather has caused delays in this activity in recent weeks.

There has been little change in commercial and industrial markets in the Third District since the previous Beige Book, according to area nonresidential developers, builders, and real estate firms. While rental concessions were widely reported "even with renewals," one contact stated that "rents are bottoming out and building values are starting to improve for top-quality buildings." The overall market is expected to tighten slowly over the year. One contact indicated that the market for industrial space "may see positive net absorption by the end of the year, but three quarters of positive absorption will be needed to put pressure on rental rates." Another contact identified "shadow inventory" persisting in the office market and suggested that "a 7 percent unemployment rate is needed before the office market sees positive net absorption." With anticipated recoveries extending from six months to two years or more for various segments of nonresidential real estate, construction activity remains weak with little growth expected through 2011. Some building activity may increase for industrial space in the latter half of the year.

Service-sector firms generally reported increases in activity since the previous Beige Book; however, for most of those contacted in March, the monthly and year-over-year gains have been modest. Firms providing services to businesses as well as those providing services to consumers indicated that activity has been advancing slightly as a result of both increases in customers and per-customer usage. Most of the service-sector firms contacted for this report expect growth to continue at around its recent pace; few expect growth to accelerate in the near future. One contact expressed the opinion of most in saying, "The cycle has turned up, but our customers are being very cautious about increases in spending."

Prices and Wages
Reports from manufacturers since the previous Beige Book continue to indicate rising factor prices, especially for energy inputs. Far fewer manufacturers report raising output prices, while a few indicate resistance to hikes from their customers, if not expectations of discounts. Retailers generally indicated that selling prices have been steady, although some reported that they have raised apparel prices in response to higher wholesale costs. Auto dealers reported continuing high prices for used cars and recent increases in prices for new cars. Although the predominant view among Third District firms is that overall inflation will move higher, slightly fewer firms expressed that view compared to reports from the last Beige Book. Nevertheless, several firms in the region said they have implemented hedges or signed forward contracts for motor fuels.

Business firms in the region reported mostly steady wages since the last Beige Book, although some continued to express concern about rising nonwage employment costs. Employment agencies reported growth in demand for workers, although they indicated that firms were continuing to delay additions to permanent or temporary staff until the need for more workers becomes pressing.

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Last update: April 13, 2011