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Federal Reserve Districts

Third District--Philadelphia

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Business conditions in the Third District remained soft in August. Manufacturers, on balance, reported nearly steady shipments but a drop in new orders. Retailers posted mixed sales results, with year-over-year increases at some discount stores but decreases at most other types of stores. Motor vehicle sales were about flat during the month but well below the level of a year ago. Bank lending continued to grow slowly. Residential real estate sales and construction activity continued to be sluggish. Commercial real estate leasing and construction activity remained slow. Reports of increases in input costs and output prices were about as prevalent in August as they were in July.

The outlook among Third District businesses is mixed. Manufacturers forecast increases in shipments and orders during the next six months. Retailers generally expect consumer demand to be restrained for the balance of the year, and auto dealers expect slow sales to persist into next year. Bankers anticipate slow growth in overall lending. Residential real estate agents and home builders have varying opinions on how much further home sales will fall, although most agree that a rebound is not likely until next year. Contacts in commercial real estate expect leasing and construction activity to remain soft until financial conditions improve.

Third District manufacturers reported nearly level shipments but declines in new orders from July to August. Around one-half of the surveyed manufacturers noted steady shipments, and the number reporting declines was just slightly greater than the number reporting increases. However, the pace of new orders slipped, on balance, as around one-third of the manufacturers reported declines from July to August, and around one-fourth reported increases. The weakness in new orders was apparent in most of the region's major manufacturing sectors. Firms supplying the construction industry have seen large drops in orders, and that market "continues to be under a lot of stress," according to producers of residential building products. In contrast, some makers of industrial materials, metal products, and electrical machinery reported increased demand for their products.

The outlook in the Third District manufacturing sector appears to have become more positive since the last Beige Book. Nearly one-half of the manufacturers contacted for this report expect new orders and shipments to rise during the next six months, and only one-tenth expect declines. However, capital spending plans of District manufacturers remain only modestly positive, on balance.

Retailers in the Third District generally posted year-over-year declines in sales in July and early August. Although several discount stores and some specialty stores achieved modest increases, most department stores and many apparel retailers had decreases. In the words of one retail contact, consumers are "sticking to the basics" in their back-to-school shopping. Sales of school supplies were near normal levels, but sales of clothes and other merchandise have been weak. Retailers said consumers have trimmed discretionary spending in response to rising food and gasoline prices, and that consumer confidence has fallen further as employment has weakened. The decline in consumer spending in the region has led to a number of closings of stores and restaurants. Store executives expect the rest of the year to be difficult, and many indicated that they are keeping tight control on inventories and reducing plans for capital spending.

Auto dealers in the region reported a near steady pace of sales in August but at a level far below sales in August of last year. Many dealerships were being closed or consolidated. Supplies of small cars continued to fall short of demand, according to dealers, but they said overall demand for vehicles was weak and total sales were unlikely to rise much even if the more popular small cars were available. Dealers expect sales to remain slow into next year, and they anticipate more dealerships will close as well.

Total outstanding loan volume at Third District banks has continued to advance slowly in recent weeks. On balance, bankers contacted in August reported slight gains in consumer lending and in real estate lending, mainly for conventional home-purchase mortgages. Commercial and industrial loan volume has been nearly flat. Some banks noted a drop in demand for business loans, and others reported they were limiting lending in some industries, notably retailing and construction. Several banks indicated they were tightening credit standards. However, other banks said they were maintaining existing standards, but loan approvals have declined because fewer prospective borrowers now meet those standards. As one banker explained, "the standards haven't changed, but if you have less income and less collateral value, you don't get the money." Looking ahead, bankers expect loan growth to remain slow while economic conditions remain uncertain.

Real Estate and Construction
Residential real estate activity in the District continued to be sluggish in August. Residential real estate agents and home builders reported that sales of existing homes remained well below the level of a year ago. One builder said he had the "lowest number of contracts in the pipeline in twenty-five years." However, another builder noted that the number of sales that were being cancelled has diminished somewhat recently. Most of the residential real estate contacts surveyed for this report said inventories of existing homes for sale were still high and that homes were still taking longer to sell than at this time last year. One agent said "our boards are full of listings, but the sales aren't matching up." Many agents said potential buyers are taking much longer to make purchase decisions than they did a year ago. Several agents noted that demand for houses that are located farther from employment centers in the region has fallen more than demand for houses that are closer. Real estate agents have mixed views on how much further demand will decline before it turns up, but most are in agreement that a convincing rebound is not likely until sometime next year.

Commercial real estate firms indicated that construction and leasing activity continued to be very slow in August. Office markets have softened as tenants have reduced their space needs by vacating buildings as leases have expired or by offering currently leased space for subleasing. Commercial agents noted that demand for industrial and retail space has declined recently; however, they indicated that the pace of new development has slowed, helping to limit the increase in vacancies. Although several new construction projects have been announced in the region, no start dates have been set, and as one contact noted, "with tight financing conditions it is likely these projects will not commence construction in the immediate future."

Prices and Wages
Reports of increases in input costs and output prices were about as prevalent in August as they were in July. Firms in the region noted increases in the prices of food products, chemicals, industrial materials, and metals. Several retailers noted recent large increases in price quotes from suppliers of many types of merchandise. Although many firms said their customers have been resistant to price increases, a significant number of firms said they have raised their prices in response to rising costs. Most of the firms reporting on employment costs in August said wage increases remained moderate. Firms also indicated that hiring is currently limited to the "most critical positions."

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Last update: September 3, 2008