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Federal Reserve Districts

Third District--Philadelphia

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Business conditions in the Third District showed signs of stabilizing during May, overall, as some sectors strengthened slightly and others weakened. Manufacturers, on balance, reported nearly steady rates of new orders and shipments in May, after decreases in April. Retailers continued to post lackluster sales results, with many stores experiencing year-over-year decreases. Sales of motor vehicles continued to fall. Bank lending has been increasing slowly. Residential real estate sales and construction activity remained well below the pace of a year ago, although there has been a slight seasonal increase in home sales. Commercial real estate leasing and construction activity has diminished in the past few months. Reports of increases in input costs and output prices were about as common in May as they were in April. Employers in the District continued to describe wage increases as moderate.

The outlook among Third District businesses varies. Manufacturers' forecasts have become more positive since the last Beige Book. On balance, they expect increases in shipments and orders during the next six months. Retailers generally do not foresee a significant increase in the sales pace during the summer. Auto dealers expect sales to weaken further. Bankers anticipate slow expansion in overall lending. Residential real estate agents and home builders expect sales to continue to be slow during the next several months despite the recent slight upturn. Contacts in commercial real estate expect leasing and construction activity to remain soft until financial conditions improve.

Third District manufacturers reported nearly steady rates of shipments and new orders, on balance, from April to May. Around one-half of the manufacturers surveyed noted no change, month-to-month, and the percentage reporting increases was offset by that of firms reporting decreases. Overall, manufacturers in the District reported a drop in order backlogs from April to May. Increased demand for their products was reported by producers of lumber and wood products, furniture, electrical machinery, and testing and measuring instruments. Decreased demand was noted by producers of apparel, chemicals, and petroleum products. Several firms reported that demand for their products was slow "due to low levels of housing construction" or "less automotive business." However, several firms reported that they were benefiting from "strong exports" or because of the "return of work" that had been done offshore.

The outlook in the Third District manufacturing sector has improved since the last Beige Book. Around one-half of the manufacturers polled in May expect new orders and shipments to rise during the next six months, and around one-tenth expect declines. On balance, manufacturers in the District expect their order backlogs to grow, and they plan to increase working hours.

Retailers in the Third District generally reported that sales continued to be slow in May. Results varied across stores, but on balance sales were level with or somewhat below sales in May of last year, on a current dollar basis. Some stores reported increases in sales of big-ticket items, such as appliances and furniture, boosted by promotions that encouraged shoppers to spend their income tax rebates. Nevertheless, most of the retailers contacted for this report said the spring selling season has not met expectations. In general, merchants said low consumer confidence and rising food and energy costs are deterring discretionary spending. One retail executive said "high gas and food prices are sucking money out of retail" and another noted that "consumers will respond only if you provide value."

The outlook among retailers in the District remains subdued. Most of those surveyed in May see no signs that consumer spending will strengthen soon, and they do not expect sales to pick up significantly until consumer confidence is restored. With an uncertain outlook, many retail companies in the region are postponing expansion plans and limiting capital improvements.

Auto dealers in the region generally reported a continuing downward sales trend in May. Although there were indications that sales of automobiles were increasing, the decline in sales of light trucks and SUVs has led to a drop in total vehicle sales compared to a year ago. Dealers in the region expect total vehicle sales to weaken further during the summer.

Total outstanding loans at Third District banks rose slowly in May. There were gains in all major credit categories, although real estate loan growth was weak. Bankers said the slow rate of real estate loan expansion was the result of a low rate of home sales as well as limits that lenders were imposing on home-equity lending. Most of the bank lending officers contacted for this report said that commercial and industrial lending was on the rise. They indicated that loan demand was coming from firms in many industries and from nonprofit institutions. However, bankers generally indicated that they were continuing to limit lending for real estate development. One banker commented that this type of lending has "ground to a halt." Consumer lending was on the rise, although some banks noted that credit card loan growth had eased recently. Several banks reported deterioration in credit quality across all loan categories, although most indicated that delinquencies and charge-offs have increased only slightly. In general, banks in the District have continued their efforts to increase deposits. In contrast to market conditions earlier in the year, however, they noted that competition for deposits has eased and, as one banker said, "deposit pricing has become a bit more judicious." Looking ahead, bankers generally foresee slow growth in overall lending during the rest of the year. They expect commercial and industrial lending growth to continue at about the current rate, but some expect a slowing in consumer loan growth, and most anticipate little or no gain in real estate lending.

Real Estate and Construction
Residential real estate activity in the third District has shown some seasonal improvement in recent weeks but remains well below the pace of a year ago. Residential real estate agents reported sales of existing homes were edging up modestly in many parts of the region, and new home sales have increased slightly in some areas, as well. However, real estate agents noted that the average time homes are on the market has not declined and inventories of homes for sale remain high. In general, residential real estate contacts do not expect housing activity to expand strongly this year. One noted that the "correction has a year to run at least," and another said "a real construction rebound will occur in 2009."

Commercial real estate firms indicated that construction, leasing, and purchase activity have eased since the winter. Nevertheless, overall office vacancy rates have edged down in most markets. Rents have remained stable for class A buildings, but have fallen for class B buildings. Contacts anticipate that sluggish activity will persist as long as economic conditions remain uncertain or, as one contact phrased it, "until the next up-tick in the capital markets."

Prices and Wages
Reports of increases in input costs and output prices from Third District business contacts continued to be as prevalent in May as in April, and for many of the same goods. Firms in the region noted increases in the prices of food products, chemicals, industrial materials, and metals. They also reported rising costs for energy. Firms noted increases in the prices of a wide range of imported goods, and they expect import prices to rise further. Most of the firms reporting on employment costs in May indicated that wage increases remained moderate. Some contacts noted that slower business activity or delays in expansion plans were resulting in reductions in current and prospective employment.

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Last update: June 11, 2008