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Federal Reserve Districts

Third District--Philadelphia

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Business activity in the Third District increased in March. Manufacturers reported rises in orders and shipments during the month. Retail sales of general merchandise were up modestly compared with the previous month and with March of 2004. Auto sales rose from February to March and were slightly above last year's level. Banks reported that lending continued on an upward trend. Firms in the service sector indicated that their business activity was rising at a moderate pace.

Third District business contacts generally expect further improvement in the region's economy in the months ahead. Manufacturers expect increases in shipments and orders during the next six months. Retailers anticipate an improved rate of sales during the spring, with modest year-over-year gains. Auto dealers also expect sales to pick up in the months ahead, although they do not anticipate an increase for the year as whole. Bankers forecast a roughly steady rise in overall lending. Service companies expect business to expand further at the current rate of growth.

Manufacturing activity in the Third District rose in March. Around one-third of the manufacturing firms surveyed during the month reported increases in new orders and shipments compared with February, and around one-fifth reported decreases. Order backlogs at area plants were virtually unchanged from February to March, and delivery times were practically steady. Growth in business was reported among firms in most of the District's major manufacturing industries, the most widespread gains being among producers of metals and other industrial materials.

The region's manufacturers generally expect further growth in business activity. Nearly half of the firms surveyed in March expect their shipments and orders to increase during the next six months, and around one in ten expect decreases. A substantial portion of the region's manufacturing firms surveyed in March (about one-third) plan to increase capital spending during the next six months, and very few expect to reduce it.

Third District manufacturers reported rising prices in March, on balance, although the number of firms noting increases during the month was somewhat lower than in the fall and early winter. Firms in all but a few of the major manufacturing industries in the region indicated that they had experienced increased input costs and raised prices for their own products in March compared with February. During the next six months 50 percent of the manufacturers polled in March expect increases in input prices, and about 10 percent expect decreases. About 30 percent plan to increase the prices of their own goods, and about 10 percent expect to reduce prices. This represents somewhat less widespread expectations of higher prices than prevailed during the fall and early winter.

Retailers reported slight increases in sales in March compared with February and with March of last year. Most indicated that unseasonably cold and rainy weather held down sales of spring apparel and other seasonal merchandise. As a result, sales for the month were below most stores' plans. Stores that specialize in luxury goods continued to post better year-over-year sales gains than stores selling less expensive merchandise. Retailers expect sales growth to improve as spring progresses, and most anticipate sales for the rest of the year will be modestly above last year. Store executives generally indicated that the wholesale cost of most of the goods they buy has not risen much so far this year. They also reported that they have not raised selling prices significantly.

Auto dealers in the region reported a healthy increase in sales in March compared with February, although compared with March of last year the increase was slight. Inventories continued to be above desired levels, except for some imported models. Most of the dealers contacted for this report said they expect sales to move up further during the spring, although they anticipate sales for this year as a whole will be down from last year. Dealers said manufacturers are continuing to offer high levels of rebates.

The volume of loans outstanding at Third District banks rose in March compared with February, according to banks surveyed for this report. Commercial and industrial loans have been increasing fairly strongly, with new borrowing being done by firms in a wide range of industries. Commercial bank lending officers reported that prospective business borrowers are increasingly requesting fixed-rate loans and that competition among lenders was limiting rate increases. Bankers also reported increases in personal loans, especially home equity loans and credit lines. Looking ahead, bankers in the District expect overall lending to remain on a steady upward trend.

In general, banks in the District are meeting their deposit growth goals, although some indicated that deposits have not increased as strongly as they had expected. These banks also noted that depositors are becoming increasingly reluctant to place funds in long-term deposits because they anticipate further increases in deposit rates this year. Investment companies reported gains in cash inflows in recent weeks but indicated that inflows were down compared with the same period last year. Although investors continued to favor equity funds over bond funds, executives at investment companies said investors appear to have become more cautious about committing funds to investments of any kind.

Most of the Third District service firms contacted for this report indicated that business had increased at a modest rate. General business services activity has been on the rise, and the pace of growth has increased somewhat. Business travel and personal travel and tourism have been growing. Trucking activity has continued to increase despite higher freight rates implemented in response to rising costs for fuel, equipment, and labor in that industry. Most of the service sector firms surveyed expect business to expand further this year, at about the current growth rate.

Employment agencies in the region reported growing demand for workers, and they expect the pace of hiring this spring to be better than last year. Companies in manufacturing, trade, services, and the financial sectors have relatively stronger hiring plans than do employers in other sectors. Manufacturing and service companies indicated that they have increasing needs for workers in technical occupations. Health care workers are also in growing demand.

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Last update: April 20, 2005