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Federal Reserve Districts

Third District - Philadelphia

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Third District businesses on the whole reported little or no improvement in July compared with June. In some sectors activity was below year-ago levels. Manufacturers reported declines in shipments and orders during the month. Retail sales were mixed. General merchandise sales were flat compared with June and down from July of last year, but sales of automobiles increased from June to July. Bank loan volumes edged down during the month, but mortgage refinancing remained strong. Tourism activity throughout the District has been slower this summer than last, and business travel has declined sharply from a year ago.

Businesses in the District generally expect some slight improvement in the fall. Manufacturers forecast an increase in orders within the next six months, although they are planning only small increases in employment and working hours. Retailers look for a pickup in sales in the fall, but most do not anticipate significant gains. Bankers expect lending in all major credit categories to be virtually flat for at least several more months.

Third District manufacturing activity continued to decline in July. Shipments from plants in the region fell, and new orders edged down. The falloff in orders was slight in most manufacturing sectors, but declines were widespread among producers of transportation equipment, metal products, and wood products. Manufacturing firms in the region continue to experience declining demand from foreign countries. Several noted significant easing in orders from Europe. Firms that supply the telecommunications industry with a variety of products continued to report very weak demand from that sector. On balance, manufacturers scaled back working hours and reduced employment during July. Manufacturers indicated that prices of inputs were nearly steady in July, and prices for the products they make moved down. Nearly six out of ten of the firms polled in July reported that their inventories were above desired levels. Four out of ten indicated that their inventory levels were satisfactory. Excess inventories appeared to be especially prevalent among producers of wood products, furniture, industrial materials, and primary metals. Overall, firms in the region plan to reduce inventories in the next six months by keeping production low and shipping from inventory.

Manufacturers expect business conditions to improve during the next six months. Firms in nearly all of the major manufacturing sectors in the region expect demand for their products to increase, although makers of wood products, industrial machinery, and instruments anticipate further declines in orders. Area manufacturers forecast a rise in order backlogs in the next six months, but they plan only slight increases in employment and working hours, on balance.

Retail sales in the Third District in July were generally steady, but down from the level in the same month last year. Overall, retailers contacted for this report indicated that their sales have been flat in recent weeks. Merchants said customer traffic has been slow and shoppers have curtailed impulse purchasing. Reports from stores in the region indicated that, on balance, general merchandise sales in the region in July were about 5 percent below the year-ago rate, in current dollars. Several stores reported steeper year-over-year declines. Some merchants noted that summer merchandise had not been in strong demand for most of July because the region's weather had been cooler than normal. Higher temperatures toward the end of the month did little to boost sales, however, and stores have begun their usual clearance sales of summer goods. Store officials have been cautious in sales plans since spring, and they have generally kept inventory levels from becoming excessive.

Store executives see few signs that sales might strengthen significantly. Most of those contacted for this report anticipate a slow recovery in sales during the fall selling season. Stocking of fall merchandise has been restrained, and some retailers expressed concern that planned inventories might not be adequate if consumer demand increases strongly.

Auto dealers generally indicated that sales picked up a bit in July compared with June. Sales of imported automobiles have been relatively stronger than sales of domestic automobiles. Manufacturers' incentives continue to support a relatively high sales rate in most parts of the region, but some dealers in areas where unemployment has increased reported recent declines in sales.

Total loan volume outstanding was edging down in July at Third District banks contacted for this report. Bank lending officers indicated that there had been some growth in commercial and industrial lending, but declines in consumer and real estate lending. Some bankers indicated that a significant portion of their new business loans were for buyouts or reorganizations of local firms rather than for expansion. Consumer lending of all types has moved down, although mortgage refinancing activity has continued at a fairly high level.

Bankers in the Third District expect overall loan volumes to be nearly flat for at least the next few months. Commercial bank lending officers expressed heightened caution with respect to the creditworthiness of potential business borrowers. Nevertheless, some banks are actively seeking new opportunities to extend credit to well-capitalized businesses in all industries, including commercial real estate.

Travel and Tourism
Travel and tourism officials in the Third District reported that tourist and recreational business throughout the region has edged down from last year. Lodging occupancy has not achieved last year's levels in most resort areas. Reports from hotels and other lodging businesses in some areas indicated that advance bookings of rooms have been declining since the summer vacation season began. Travel and visitor bureaus in the region generally noted significant declines in business travel compared with last year. In particular, attendance at recent conventions and other business meetings has fallen below anticipated levels.

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Last update: August 8, 2001