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Federal Reserve Districts

Third District--Philadelphia

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Overall business activity in the Third District has continued to grow modestly since the previous Beige Book, with various sectors experiencing typical seasonal patterns--positive and negative. Since the last Beige Book, manufacturing activity has continued to grow modestly with some signs of a seasonal slowdown. Retail sales overall generally increased for the holiday season, meeting seasonal expectations. Motor vehicle dealers experienced further strong sales growth and strong pricing power, overcoming some of the typical seasonal drag. Third District banks have reported slight growth in loan volume outstanding since the last Beige Book. New home construction slowed further, driven by seasonal trends and falling prices for existing homes. Commercial real estate contacts continued to report slow growth year-over-year, although anticipated seasonal slowing has been a factor since the last Beige Book. Service-sector firms reported generally modest growth. Price pressures remained contained for most sectors, with little change from the last Beige Book.

The general outlook seems to have improved for most firms since the last Beige Book. Manufacturers anticipate rising shipments and orders during the next six months. Retailers expect slightly stronger sales, and auto dealers are increasingly confident that pent-up demand will carry well into the spring selling season. Banking, real estate, and service-sector firms continue to plan for slow growth in 2012. Many have voiced concerns over the ongoing lack of a housing recovery, the threat from Europe's economic woes, and the indecision on numerous federal budget issues.

Since the last Beige Book, Third District manufacturers have reported further modest increases in new orders and shipments. Gains were widespread among the makers of industrial machinery and equipment, and of food products. Similarly, a supplier to the broad industrial market confirmed continued growth but noted some softness of a seasonal nature. Some makers of lumber and wood products and of electrical machinery reported seasonal slowing. However, one electrical equipment firm logged the worst month of orders in five years. Several contacts attributed additional slowing to end-of-year inventory adjustments. Contacts in primary metals reported mixed results dependent upon their firm's market orientation, for example, to Europe or to the domestic auto industry.

Most Third District manufacturers remain split between expecting business conditions to improve during the next six months and expecting conditions to stay the same. This overall positive tendency has pervaded more sectors since the last Beige Book. However, the currently low seasonal demand, cited by many firms, may be a large factor in the anticipation of near-term gains. Manufacturing contacts continued to cite weak housing markets as a drag, Europe's woes as a threat, and rising auto demand as a positive factor. Expectations of capital spending and future hiring also remain positive but have moderated since the last Beige Book.

Third District retailers reported strong holiday sales in November and positive, but softer, sales in December. An outlet operator recounted that the typical budget-conscious, discount-driven consumer shopped early, then faded somewhat. The longer shopping season and added store hours produced greater overall sales volumes but also increased the wage bill for hourly workers. Profits for the season were maintained by closely watching inventories and markdown levels. Unseasonably warm weather dampened sales of cold-weather goods, but "rain boots sold well." Prospects beyond this holiday season are expected to follow recent trends with high-end, online, and outlet market segments attracting the most consumer spending.

Auto sales remained unseasonably strong through November and December, according to a Third District industry contact. With still a little more demand than supply, dealers continue to offer less discounting and earn better grosses. Also, pent-up demand remains strong. An industry contact indicated that dealers may begin hiring if robust sales continue into the spring season.

Overall loan volumes continued to expand slightly in the Third District since the previous Beige Book; however, many bankers reported difficulty maintaining loan volumes. Some reported turning down deposits for lack of sufficient lending opportunities. The strongest loan growth continued to emerge in home mortgages, including refinancings. Commercial real estate and C&I lending were flat. Credit quality continued to improve somewhat. Third District bankers expressed several concerns, including Europe's economic problems, a lack of recovery in the housing market, uncertainty and a lack of confidence with Washington, and uncertainty over the renewal of federal contracts.

Real Estate and Construction
Residential builders are "glad to have 2011 behind" them. Builders reported that the year closed with sales activity slowing somewhat more than seasonal trends would predict due to lack of confidence, as existing home prices continued to fall in most markets. Some of the activity reported in the last Beige Book dissipated, as builders were unable to close on contracts. New construction activity continues to shift from the single-family market toward the multifamily market. Some builders are planning for growth in 2012, even some hiring. However, their plans assume an increase in market share and an expectation that some competitors will not endure a seventh consecutive year with little or no growth.

During a seasonally slow period for most nonresidential real estate activity, contacts have reported no significant changes since the last Beige Book. The seasonal lull should generate a little pickup in leasing in early 2012. The sudden announcement in early December of an immediate refinery closing, not anticipated until early 2012, sent hundreds of workers home, including construction workers with jobs associated with facility maintenance and repair. A few weeks later another refinery, currently in the process of restarting, announced expansion plans. New construction and renovation plans remain mostly limited to institutional, life sciences, multifamily, and warehousing sectors in select markets. A portion of the new construction, especially for warehousing, represents market shifts among regions, rather than net overall market growth. The overall outlook for demand of nonresidential space is for continued slow growth.

Third District service-sector firms have continued to report modest growth since the last Beige Book. A staffing firm noted that firms appear busier, based upon an end-of-year uptick in short-term contracts to provide coverage for vacations and extra holiday business--a pattern not observed since the recession began. The overall trend toward temporary or contract basis for new placements, rather than permanent, full-time hires, remains unchanged. Contacts indicated that financial services will face challenges in 2012, and many sources expressed concern for defense-related activity in the wake of recent and ongoing federal budget indecisions. The majority of service-sector firms anticipate slowly improving growth rates through 2012.

Prices and Wages
On balance, price levels have changed little since the previous Beige Book. Auto dealers and freight shippers still command favorable pricing power. Several manufacturing firms recently raised prices and have yet to observe any pushback from their customers. Retailers and homebuilders continue to report very tight margins. Builders are worried about ongoing closures along their supply chain as the recession in construction continues. Substantial cost increases are anticipated when a recovery emerges and triggers demand for more building materials. Although exceptions exist within specific submarkets, concessions are still expected of many bankers, builders, and leasing agents. Most firms reported no significant upward wage pressure. While most firms are anticipating greater increases in health benefit costs, a few have indicated a significant rollback from last year's large rate hike.

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Last update: January 11, 2012