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Federal Reserve Districts

Third District--Philadelphia

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Economic conditions in the Third District have been mixed in recent weeks. Manufacturers, on balance, reported an increase in shipments and a steady rate of new orders. Retailers indicated that sales have been rising slowly, although they remained below the year-ago level for most stores. Motor vehicle dealers indicated that sales have improved somewhat, although dealer closings continued. Third District banks generally reported decreasing loan volume outstanding and further declines in credit quality. Residential real estate agents and home builders noted mostly unchanged sales rates. Nonresidential real estate leasing and construction activity continued to decline. Service-sector firms generally reported that activity continued to be slow. Business firms in the region reported mostly level prices, although some indicated that prices of some basic commodities have increased recently.

The outlook in the Third District business community remained lackluster in November. Manufacturers forecast a rise in shipments and orders during the next six months, on balance, although the balance of positive views has eased in the past month. Retailers have mixed views, but on balance they expect sales for the holiday shopping period this year to roughly match last year. Auto dealers expect sales to improve in the near-term, although they say the number of dealers remaining in business will continue to decline. Bankers anticipate demand for credit to remain weak though the winter. Residential real estate contacts believe housing demand will continue to firm up, but they do not expect a substantial increase in sales until sometime next year. Contacts in nonresidential real estate expect leasing and construction to remain weak well into 2010. Service-sector firms expect activity to remain near current levels in the near term.

Third District manufacturers reported increases in shipments and new orders, on balance, from October to November, although results varied across the major manufacturing sectors in the region. Increased demand for their products was noted by makers of food products, apparel, furniture, chemicals, and electrical equipment. Declining demand was noted by makers of lumber and wood products, metal and metals products, and industrial materials. Several firms said that the recent increases in business been slight and that the pace of activity remained slow. As one firm noted, "activity is still down compared with last year," and another said "even with the slight uptick, activity is still down from the previous high."

Third District manufacturers expect business conditions to improve during the next six months, on balance. Among the firms polled in November, about half expect new orders and shipments to increase during the next six months; about one-tenth expect decreases. Although the balance of opinion among area manufacturers remains positive, it is slightly less optimistic than it was earlier in the fall. Nevertheless, the number of manufacturing firms planning to increase capital spending plans has risen slightly.

Third District retailers reported slight increases in sales during October and early November compared with September, although most indicated that sales remained below the year-ago pace. Retailers said consumers appear somewhat more willing to spend, although comments such as "the consumer is focused on basics' and "consumers want good value' were common among area merchants. Although sales have improved for several lines of merchandise, retailers noted sales of big-ticket home goods remained weak.

Most Third District retailers have cautious views of year-end holiday shopping period. Forecasts vary from slight year-over-year increases to small year-over-year declines. Retailers, including those expecting gains, have limited their inventories of merchandise for the holiday period, and many have shifted their merchandise mix to lower-priced items.

Third District auto dealers reported some improvement in sales from September through early November. Dealers said the sales increase, although slight, was widespread across vehicle types. Nevertheless, closings of dealerships continued throughout the region, and more are expected. Looking ahead, dealers foresee continued improvement in sales for those who remain in business.

Total outstanding loan volume at Third District banks has dipped in recent weeks, according to bankers contacted for this report. Bankers said consumer lending and residential mortgage lending has declined as result of both tighter credit standards and softer loan demand. Many indicated, however, that the drop in commercial lending was mostly due to a decline in demand. One banker said "we're calling on prospects but we're not getting new business' and another said "new loans are not enough to offset pay-downs and pay-offs.' However, despite the efforts to expand business lending, both bankers and business firms noted that there has been a pullback in lending to retailers generally and to firms in some service sectors. Most of the banks contacted for this report said that credit quality continued to deteriorate for all categories of lending, although several indicated that the increase in delinquencies and charge-offs has slowed. Bankers generally expect demand for credit to remain weak over the winter, but some expect a gradual increase in demand to gain strength by the middle of next year.

Real Estate and Construction
Sales of new and existing homes were roughly steady in most parts of the Third District from September into November, according to local real estate agents. They generally indicated that sales of lower-price homes were moving up slightly but sales of higher-price homes continued to be slow. Overall sales remained well below the year-ago level. Selling prices of existing homes continued to move down, although some real estate agents said the decline appeared to be easing. Builders continued to offer incentives on new homes. Looking ahead, real estate agents expect steady or only modestly strengthening home sales. One agent remarked, "just because we've hit the bottom doesn't mean it's starting to get better."

Nonresidential real estate firms indicated that leasing and purchase activity has continued to decline and that vacancy rates remain on the rise. Effective rents have been falling significantly, prompting some relocations and lease renegotiations by tenants, but no increases in occupied space. Contacts expect nonresidential real estate markets to remain weak well into next year. One contact said, "markets will remain under stress and uncertainty."

Service-sector firms generally reported that activity has remained slow since the last Beige Book. Among the region's business services firms contacted for this report, nearly all indicated that demand for their services has been flat in the past few weeks, although a few said they have had slight gains recently. The region's service-sector firms see no signs that business will pick up significantly in the near future. As one contact said, "Our clients are showing no inclination to increase spending."

Reports on input costs and output prices have been mixed since the last Beige Book. Manufacturing firms noted some increases for the commodities they use but mainly steady prices of the products they make. However, some makers of food products and chemicals have raised prices. Retailers have generally kept their selling prices steady, and several noted that they were realigning product mixes to emphasize lower-priced merchandise. 

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Last update: December 2, 2009