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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, although the pace has softened. Manufacturers reported increases in shipments and new orders in May, although at a much slower pace than the past two months. Retailers posted slight year-over-year sales increases in May. Motor vehicle dealers reported a slowdown in sales during May compared with the first four months of the year. Third District banks reported little overall change in loan volume outstanding, on balance, since the last Beige Book. Residential real estate agents said sales have increased seasonally, but house prices have been flat to down. Contacts in the commercial real estate sector said that market conditions have shown little change since the first quarter. Service-sector firms reported modest increases in activity. Business contacts reported further price increases for inputs as they did in the previous Beige Book. There have been some retail price increases, and more firms in a range of sectors have implemented fuel surcharges.

Expectations among Third District business contacts are mostly for slow growth. Manufacturers forecast a modest rise in shipments and orders during the next six months. Retailers expect sales to advance slowly on a year-over-year basis. Auto dealers say the outlook is uncertain. Bankers expect only slight growth in lending. Contacts in residential real estate expect moderate seasonal gains in sales, but they expect sales for this year as a whole to be about the same as sales last year. Contacts in commercial real estate expect conditions to improve slowly, with markets firming around the end of the year. Service-sector companies expect continued slow growth.

Reports of widespread, robust demand growth for manufactured products as of the last Beige Book gave way to two months of easing in the breadth and pace of recovery. Less than 30 percent of Third District manufacturers reported increases in shipments and orders in May -- slipping from over 50 percent since the last Beige Book. Among key manufacturing sectors in the Third District, the number reporting increases of both shipments and orders narrowed to 7 from 13 since the last Beige Book. The strongest reports of orders came from producers of chemicals; food; stone, clay, and glass; and fabricated metal products. Since the last Beige Book, declines in orders broadened from producers of apparel and rubber products to include producers of electronic equipment and instruments. Failure to pass a multiyear transportation infrastructure reauthorization bill and the ongoing real estate slump were cited by five different manufacturing sectors as hampering the recovery.

Third District manufacturers remain mostly positive about business conditions over the next six months; however, the percent of firms expecting increases fell off sharply since the last Beige Book, from 66 percent to 36 percent. Among the firms contacted in May, about 38 percent expect increases in new orders and shipments, while about 20 percent expect decreases. A little uncertainty has crept back into manufacturers' expectations, with several contacts citing "swings" in activity. Capital spending plans over a six-month planning horizon have changed little since the last Beige Book, with about one-third of firms projecting increases.

Third District retailers generally reported small year-over-year increases in sales in May, although results varied by store type. Discount stores and some luxury goods retailers posted better increases than mid-price retailers and department stores. Retailers said sales of spring apparel have been held back by cool, rainy weather. Several merchants said that high gasoline prices were deterring shopping trips and constraining consumers' discretionary buying. Looking ahead, store executives expect just slow growth in sales. One merchant's comment expressed the general opinion: "The consumer is responding to value. Only confidence in the job situation will prompt broader buying."

Third District auto dealers generally reported that sales slowed in May from the pace set from January through April. Some dealers said they were facing supply constraints resulting from the interruption of Japanese vehicle and parts production, and some dealers said demand has slowed as consumers reconsider model preferences in response to higher gasoline prices. Dealers are uncertain of the future course of sales; most said the sales rate going forward will be more sensitive to gasoline prices and consumer confidence than it had been earlier in the year.

Third District banks contacted in May gave mixed reports on loan volume outstanding. Some posted increases in consumer and business loans, but others reported drops in these categories since the last Beige Book. On balance, total credit extended by banks in the region has been flat in recent weeks. Although some bankers have had recent increases in loan demand from small and medium businesses, most said demand for credit from this sector has been weak. "Loan demand hasn't moved at all," one said, even as competition among lenders has increased. Most of the banks surveyed in May indicated that credit quality has been improving, although some said the pace of improvement has been slow. Looking ahead, the general view among the region's bankers is that loan demand will move up slightly, at best, in the near future.

Real Estate and Construction
Residential real estate activity has picked up since the previous Beige Book in most parts of the Third District, according to residential real estate agents contacted for this report. Agents continued to note that the sales pace has been relatively stronger for middle- and low-price homes and weaker for high-price homes. Agents attributed the improved sales pace to the usual seasonal gain and buyers' concern that mortgage loan rates are likely to increase in the future. Looking ahead, residential real estate agents expect sales for this year as a whole to be level with last year. An agent who remarked that "we are off the bottom, but it's going to be a slow comeback" expressed a common opinion. Residential agents generally reported flat to slightly falling house prices for existing homes. New homebuilders indicated that these lower existing home sales prices further reduced their customer traffic in May. While they see more committed buyers among the traffic, overall demand for new homes remains flat.

Commercial and industrial market conditions in the Third District have shown little change since the previous Beige Book, according to area nonresidential real estate contacts, although some noted that office vacancy rates have edged down slightly in some areas. Rents have been steady in most areas, and concessions remain common. Contacts in commercial real estate reported that demand for space in Class A office buildings has strengthened relative to Class B space as local companies relocate upon lease expirations. "Companies are trading up for higher quality," one contact said. This trend is expected to continue for the rest of this year, and any reduction in vacancy rates for less desirable buildings is expected to lag the modest decline in Class A vacancy rates that commercial real estate agents forecast for the balance of 2011. Industrial rents have been flat, but some contacts expect them to rise toward the end of the year as demand for space grows in the absence of new supply.

Third District service-sector firms contacted for this report generally described demand for their services as growing modestly. Business-service firms noted some increased activity as a result of both greater usage by current clients and demand from new client companies. An executive at a business-service firm said, "Our activity in cyclical sectors is starting to improve." Contacts in the transportation sector reported some recent easing in the slow, steady growth rate that held for the first four months of the year. Contacts in engineering and architectural services reported slight gains in current activity and a somewhat stronger upturn in inquiries. Most of the service-sector firms polled in May expect growth to continue at around its recent pace.

Prices and Wages
Since the previous Beige Book, nearly half of all manufacturers reported rising factor prices, especially for energy and commodities, but less than half of those firms are able to pass costs through to their customers. However, imposition of fuel surcharges by service firms in the region has increased. Retailers generally indicated that selling prices have been steady, except for food products and some petroleum-based products and imports. Retailers noted that consumers continue to favor lower price-point merchandise, and stores are continuing to alter merchandise selection to include more of those items.

Business firms in the region reported mostly steady wages since the last Beige Book. Reports on nonwage employment costs varied; some firms indicated that benefits costs, primarily for health insurance, have been stable, but others indicated that they have had increases ranging up to 10 percent or more compared with a year ago.

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Last update: June 8, 2011