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Federal Reserve Districts

Third District--Philadelphia

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Economic conditions in the Third District improved slightly in February. However, not all sectors shared in the gains. Manufacturers reported just steady activity. Retail sales of general merchandise rose slightly, but auto sales remained soft. Bank lending increased modestly overall, but mortgage lending continued to decline. Sales of new and existing homes slowed further, but commercial real estate markets showed further signs of firming.

Third District business contacts generally expect business activity to continue to expand at a slow pace. Manufacturers expect demand for their products to increase. Retailers expect continued slight expansion in sales, but auto dealers do not foresee a turnaround in sales. Bankers anticipate increases in business and consumer lending, but they do not anticipate a resurgence of mortgage lending. Residential real estate agents and home builders said they see no clear signs that the downtrend in homes sales is coming to an end. Commercial real estate contacts forecast further increases in rents and declines in vacancy rates.

Third District manufacturers reported a steady pace of shipments and new orders from January to February. Order backlogs edged down. Some makers of industrial materials and equipment noted increased demand for their products, but overall, reports of rising demand were offset by reports of falling demand. Capital spending by Third District manufacturers remained on the rise in February.

Manufacturers, on balance, expect demand for their products to increase. Among the manufacturers contacted in February, a little more than one-third expect their shipments and orders to rise during the next six months; just under one-fifth expect decreases. The outlook for improved business is fairly widespread among the major manufacturing sectors in the region, although forecasts are not quite as robust as they were last year.

Third District retailers contacted in February generally indicated that sales picked up from January and have been rising modestly on a year-over-year basis. Cold weather and clearance sales in mid-February helped stores clear out winter apparel. Sales of consumer electronics have also been strong, supported by discounting. Most of the store executives surveyed for this report described their inventories as tight as they began taking delivery of spring merchandise. Looking ahead, retailers expect sales growth to continue at around the current rate during the spring selling season.

Auto sales in the region remained sluggish in February. Compared to a year ago, sales of domestic makes continued to weaken, while sales of most foreign makes rose. Dealers said they do not expect a general improvement in sales, and they anticipate closings and consolidation among outlets.

The volume of loans outstanding at Third District banks rose moderately in February, according to commercial bank lending officers contacted for this report. Commercial and industrial lending edged up. Personal lending rose, especially credit card lending. However, demand for residential mortgages and home equity loans and credit lines continued to weaken.

Bankers in the District expect business and consumer lending to increase gradually in the next few months, but they do not expect residential mortgage lending to pick up. Although credit quality was generally described as good, some banks said they were seeing signs of weakening financial conditions among home builders and auto dealers.

Real Estate and Construction
Commercial real estate firms reported that vacancy rates in the regionís office markets have declined slightly in the past few months. Rents have risen for newer buildings and tenant concessions have decreased, but effective rents have eased somewhat for older buildings. The amount of leased space has increased in most markets throughout the region. Commercial real estate contacts expect rents to remain on the rise and vacancy rates to continue to decline through the rest of the year. However, they expect office construction activity to moderate after several large buildings currently under construction or renovation are completed. Demand for industrial space remains strong, with rising rents and declining vacancies. Construction and sales of industrial buildings have been brisk, especially for warehouse and distribution facilities along the regionís highways. Competition for prime locations has been pushing up the price of land suitable for industrial uses in many suburban areas.

Residential real estate agents and homebuilders surveyed in February indicated that sales were still declining. Real estate agents noted that the number of existing homes listed for sale has declined, although the average time houses are on the market before being sold has increased. Home builders have scaled back construction activity sharply, although some builders with projects underway intend to complete construction of the houses planned for those projects. Home builders reported a continued high rate of cancellations, and some have made significant price reductions to sell finished houses. Real estate agents indicated that price appreciation for existing homes has come to a virtual standstill. Although both builders and real estate agents said customer traffic has increased recently, they do not expect a clear signal of the trend in sales until they can gauge the strength of the usual spring upturn.

Prices and Wages
Business firms in the Third District noted increases in the costs of raw materials and other inputs in January and February, although reports of price increases were not as widespread as they were in the fall. Manufacturers noted increases in prices for metals and industrial equipment. However, they indicated that price increases in general have been less frequent in the past few months than they were last year. Retailers said selling prices have not changed much in the past few months.

Firms reporting on employment costs in February noted a generally steady trend of moderate wage increases. However, employers in a number of industries said they have had to raise salaries by more this year than last year in order to hire and retain workers in certain professional and managerial occupations, as well as for workers with higher skill levels in a variety of jobs.

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Last update: March 7, 2007