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Federal Reserve Districts

Third District--Philadelphia

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Business activity expanded modestly in the Third District in October and early November. Manufacturers, on balance, reported slight increases in new orders and shipments. Retailers generally reported somewhat better sales growth in early November than in October. Auto sales remained slow, and below the year-ago level. Overall bank lending has been rising, with better growth in business lending than in consumer and real estate lending. Residential real estate sales remained well off the pace set last year and earlier this year, and home building continued to decline. Commercial building occupancy and rents have been rising, but building prices have eased down and leasing activity has slowed since mid-year. Firms reporting on labor costs generally noted a continuing trend of moderate increase in wages, but they continued to report large increases in health care benefits costs. Firms reported increases in input costs and output prices in November, and some noted that prices were rising for an increasing number of imported goods.

Third District firms generally foresee continued growth, but optimistic views are less prevalent than they were earlier this fall. Manufacturers expect increases in demand for their products, on balance, but the number forecasting increases has declined since a month ago. Retailers generally expect sales for the Christmas shopping period to increase from a year ago, but only modestly. Auto dealers generally do not expect the sales rate to strengthen. Bankers anticipate slow expansion in overall lending, with gains coming largely from commercial and industrial lending while consumer and real estate lending growth slows. Home builders and residential real estate agents expect sales to remain weak through the winter, and they are not certain that sales will improve appreciably next spring. Contacts in commercial real estate anticipate near steady demand for office and industrial space, although they believe leasing activity will not increase significantly unless employment growth in the region accelerates.

Third District manufacturers, on balance, reported only small increases in shipments and new orders in November. Around one-third of the manufacturers surveyed noted increases and nearly as many noted decreases. Increases appeared to be concentrated in a few sectors. Printing firms and producers of food products and textiles reported gains; in most other manufacturing sectors shipments and orders were off for the month. For the Third District manufacturing sector as a whole order backlogs declined from October to November and delivery times decreased. Typical comments from Third District manufacturers are that "business is really being hurt by the residential construction slowdown," but "export business has been strong."

The outlook in the Third District manufacturing sector is positive, although not as strongly optimistic as it had been through most of this year. Around forty percent of the firms contacted for this report expect increases in new orders and shipments over the next six months, and twenty percent expect decreases. Manufacturing firms in the region plan to increase capital spending during the next six months, on balance, but the number of firms that expect to spend more only slightly exceeds the number that expect to spend less.

Retailers in the Third District reported that sales growth improved in early November following scant gains in October. Merchants said the turn to colder weather boosted sales of winter apparel and that new consumer electronic products also sold well. However, there was some variation among types of stores. Early markdowns of some product lines at discount stores gave their total sales a boost, but some specialty stores saw sales growth falter. Retailers expect sales for the Christmas shopping period to increase moderately from a year ago. Although most of the store executives contacted for this report believe "consumers have the capacity to spend when they're motivated," as one retailer phrased it, merchants in the region expect strong gains only for sales of electronics, such as flat panel televisions and personal computers. They expect sales of other merchandise lines to move up only slightly, if at all, for the fourth quarter of this year compared with the same period last year.

Auto dealers in the region generally reported slow sales rates, especially for sport utility vehicles. Overall sales remained below the year-ago level, and most of the dealers surveyed for this report do not expect improvement.

Total outstanding loans at Third District banks rose in October and early November. Commercial bank lending officers contacted for this report generally indicated that the increase was stronger for commercial and industrial loans, mainly to middle-market firms, than for personal and real estate loans. They indicated that credit card lending has been rising moderately. Banks and other financial companies engaged in residential mortgage lending reported a large shift toward conforming mortgages and away from sub-prime and jumbo mortgages. Most bank contacts indicated that asset quality overall has weakened slightly in the past few months. Some bankers said repayment rates on credit card debt have slowed and delinquencies have risen. Delinquencies have also increased on mortgage debt, and foreclosures have risen. Looking ahead, bankers generally foresee slow growth in overall lending. They expect mortgage and personal lending to move up slightly, at best, and most expect growth in business lending to continue to move up at around its current pace, although some banks noted that their "pipeline is low" for new loans to businesses.

Real Estate and Construction
Residential real estate activity continued to be very slow in October and early November, according to home builders and real estate agents contacted for this report. Builders continue to make price reductions, but have not been able to boost sales. Builders also reported continuing high rates of cancellations, and some builders noted that tightened mortgage lending standards had eliminated some buyers who had contracted for new homes. As sales have declined builders in the region have stopped work on several projects and laid off workers. Residential real estate agents also reported a slow pace of sales, especially in the region's resort areas that had been very active until mid-year. Although real estate agents said price appreciation was still positive, they indicated that very few house are being sold at listed prices. One agent said that "there are no more multiple offers" for houses and he has "price discussions" regularly with sellers whose houses are on the market for more than a few weeks. Contacts among builders and real estate agents expect sales to remain flat well into next year, and the most optimistic expect any spring pickup to be slight. According to one agent "the glory days are over," and a builder said "the pipeline for next year is anemic."

Commercial real estate firms report that office vacancy rates have declined and rents have increased in most office markets in the Third District in the past few months. However, they noted that leasing activity has decreased and building prices have edged down. Construction of educational and health care facilities has been steady or rising throughout the region, but construction of commercial buildings has slowed. Nevertheless, contacts in commercial real estate said there are plans for new buildings that could be acted on next year if the region's supply of large blocks of office space continues to trend down and employment growth improves.

Prices and Wages
Reports of increases in input costs and output prices from Third District business contacts were about as prevalent in November as they were in October. Manufacturers noted increases in prices of food products, chemicals, and machinery, but they reported some declines in prices of lumber and transportation equipment. Firms in a range of industries reported increases in energy and transportation costs. Retailers noted spreading price increases for imported goods. Most of the firms reporting on employment costs in November indicated a continuing trend of moderate wage increases, but several firms noted that increases in health care costs continued to be large.

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Last update: November 28, 2007