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Federal Reserve Districts

Third District--Philadelphia

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Business conditions in the Third District improved modestly in August. Manufacturers reported moderate increases in orders and shipments during the month. Retailers indicated that sales of general merchandise rose in August compared with July and with August of last year, although the year-over-year gain was slight. Banks and other lending institutions reported that overall lending continued on an upward trend, although some noted that mortgage activity has eased. Sales of existing homes have been steady, but sales of new homes have slowed somewhat. There have been some indications that demand for office and industrial space might be turning up in some parts of the region, but overall the commercial real estate market remains soft.

Contacts in the Third District business community generally expect economic activity in the region to expand through the fall and winter, but most do not expect strong growth. Manufacturers anticipate increases in shipments and orders during the next six months. Retailers expect sales for the fall to be better than sales in the same period last year, but they do not believe the growth rate of sales will accelerate significantly from the current pace. Bankers expect overall lending to increase, primarily as a result of gains in consumer lending. Real estate agents and home builders expect home sales to remain strong, although they think the sales rate going forward could be slower than what it has been for the year so far. Contacts in commercial real estate anticipate a slight increase in demand for space during the rest of this year.


Manufacturing activity in the Third District increased moderately in August. Almost four in 10 of the manufacturing firms surveyed during the month posted higher shipments and orders compared with the prior month, and fewer than two in 10 reported decreases. Order backlogs at area plants were steady from July to August, but delivery times edged down. Firms in almost all of the major manufacturing sectors in the region indicated that business was growing. Increases in demand were especially strong for firms producing plastic products, electrical equipment, measuring and controlling instruments, and food products. However, makers of lumber and wood products reported generally steady orders during August, in contrast to increases in previous months, and producers of transportation equipment noted a falloff in orders.

The region's manufacturers generally expect further gains in business activity. More than half of the firms surveyed in August expect their shipments and orders to increase during the next six months, around one-third expect them to be steady, and less than one in 10 expect decreases. On balance, area manufacturing firms are scheduling increases in capital spending, and they are planning to add employees. The outlook is positive in almost all of the major manufacturing sectors in the region, but makers of wood products and electrical equipment expect a slowdown in business during the next six months.


Retail sales of general merchandise in the region rose in August compared with July and with August of last year. Although most of the retailers contacted for this report said their year-over-year gains were slight, several stores selling luxury goods and higher-priced apparel indicated their sales were well above last year's results. Back-to-school merchandise and fall clothing were generally selling about in line with merchants' expectations. Most retailers indicated that their inventories were at planned levels, but some stores reported that they still had summer merchandise to be sold.

Third District retailers expect sales for the fall to be above the same period last year, but they do not expect large gains. Several retailers said there was unlikely to be a strong pickup in overall sales in the absence of new products to stimulate consumer demand. A number of store executives said their expectation of slow sales growth was prompting them to delay expansion plans, although renovations of existing stores were proceeding on schedule.


Outstanding loan volume at Third District banks rose in August, according to banks contacted for this report. In the past several weeks, consumer credit has increased moderately. Commercial and industrial loans have been growing, although the gains have varied among banks. Some reported strong growth, but others have had only slight increases. Banks gave mixed reports on residential real estate lending. Some have had increases, but others indicated that mortgage activity has eased. In general, bankers reported steady to improving credit quality.

Bankers in the District generally expect overall lending to rise during the rest of the year. They anticipate continuing growth in consumer lending, but they have mixed views on business lending. Some bankers noted recent slowdowns in business loan applications, which they attribute to customers delaying expansion plans, but other bankers believe the slowdown may be merely seasonal. Residential real estate lenders expect mortgage activity to remain near the current pace as long as there is no appreciable increase in interest rates.

Real Estate and Construction

Commercial real estate firms in the Third District reported that office leasing activity has been growing slightly, although the increase in rented space has been small. Demand for space has edged up in some suburban markets but not in the Philadelphia central business district. On balance, there has been little change in the region's overall office vacancy rate, and effective rents remain under downward pressure. Commercial real estate firms expect demand for space to move up somewhat in suburban markets as long as regional economic conditions improve, but they expect continuing softness in the Philadelphia central business district. Industrial building vacancy rates have increased and rents have eased in most parts of the region. However, some areas of strong demand have emerged recently, and commercial real estate firms expect a more widespread increase in demand for industrial space in the months ahead.

Residential real estate agents indicated that sales have been roughly steady in recent weeks and above the pace during the same time last year. Although they reported that the supply of homes for sale is still tight, they noted some signs that price appreciation appeared to be easing. Home builders reported a slowing in sales in August. Some builders said the slowing was primarily seasonal and they expect sales to pick up by the end of September. Builders reported that they have been raising prices in response to rising material costs and that the price increases have had little negative effect on sales. Both builders and real estate agents expect the pace of sales to remain strong unless mortgage interest rates move up significantly.

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Last update: September 8, 2004