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Federal Reserve Districts

Third District--Philadelphia

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Business conditions in the Third District remained generally weak in November. Manufacturers, on balance, reported declines in shipments and new orders. Retailers indicated that the pace of sales was nearly steady during November but down from the same month last year. Motor vehicle dealers reported very slow sales. Bank loan volume moved up in November, but credit quality deteriorated. Residential real estate sales and construction continued to fall. Commercial real estate investment and construction activity declined further. Business firms in the region reported decreases in input costs and output prices in November, particularly for basic commodities.

The outlook among Third District businesses is generally not positive. Manufacturers forecast decreases in shipments and orders during the next six months. Retailers are not optimistic about the holiday shopping period. Auto dealers do not expect sales to improve in the near future. Bankers anticipate slow loan growth and further weakening in credit quality. Residential real estate agents and home builders expect sales to remain slow for the next several quarters at least. Contacts in commercial real estate expect leasing and construction activity to remain at low levels as long as financial conditions remain volatile.

Third District manufacturers surveyed in November reported declines in shipments and new orders, on balance, compared with October. Nearly one-half of the manufacturers surveyed noted decreases in those measures, and only one-fifth reported increases. Reports of declining demand exceeded reports of rising demand in practically all the major manufacturing sectors in the region. The falloff in demand was especially large for firms that manufacture construction-related goods and materials. One maker of housing products said, "The industry is at a standstill, and there will be a massive shakeout by next spring."

The outlook among Third District manufacturers has become more pessimistic in the past month. Among firms polled in November, a little more than one-third expect new orders and shipments to decline during the next six months, and a little less than one-third expect increases. Area manufacturers have reduced capital spending plans since last month, and future outlays are now slated to decline, on balance. Area manufacturers also plan to reduce inventories, on balance, during the next six months. Area manufacturers are cutting inventories in response to declining production, and some are reducing inventories of commodities to avoid losses on their value as prices decline. As one manufacturer of metal products noted, "Inventory liquidation is the order of the day until a price floor is achieved."

Most of the retailers contacted for this report indicated that customer traffic and sales were nearly steady during November after declining from September to October. Nevertheless, many stores reported that this November's results were below those of November of last year. Discount stores continued to post better performances than most other types of stores, although some stores selling apparel noted a seasonal pickup in sales of outerwear. Store executives said price markdowns have been widespread and steep, which has given some support to sales but is negatively affecting profit margins. The outlook for the holiday shopping period among Third District retailers is not optimistic. They expect restrained buying by consumers, and even retailers who believe holiday-period sales could exceed current expectations say extensive discounting will mean that there might be "volume but no profit," as several remarked. Many of the retailers contacted in November said they expect sales to remain sluggish in the first half of 2009, and they have cut back on expansion plans and capital spending in general.

Nearly all the auto dealers in the region surveyed in November reported a very slow pace of sales, well below the rate of a year ago, although a few noted a slight improvement from the September and October sales rate. Dealership closures continued, with some going out of business due to falling sales and others closing because they have not been able to obtain inventory financing. Dealers see no signs of a rebound in sales, and they expect more dealerships to close in the months ahead.

Total outstanding loan volume at Third District banks rose in November, according to bankers contacted for this report. There have been gains in business loans, real estate loans, and consumer credit. Several regionally based banks said they have picked up new business borrowers who have terminated relationships with large nationwide financial intermediaries. Most of the banks contacted for this report said that credit quality measures continued to deteriorate for both business and personal loans, and that delinquencies and defaults on loans to real estate developers and builders, including residential and some commercial developers, have risen markedly. Nearly all banks indicated they were tightening credit standards; some said they were imposing "stricter underwriting criteria across the board," and others said they were allowing "fewer exceptions" to underwriting standards for new loans. Looking ahead, bankers generally expect, at best, slow expansion in lending in 2009.

Bankers reported strong competition for deposits. Many are raising rates on transactions and savings accounts and on certificates of deposit. The upward trend in deposit rates has raised concern among bankers that net interest margins will remain tight well into next year. Several bankers noted that higher rates have prompted some growth in deposits but that stronger deposit growth will be needed to obtain sufficient funds to meet their loan growth targets.

Real Estate and Construction
Residential real estate activity in the Third District has softened in recent weeks. Residential real estate agents and builders reported little progress in reducing inventories of homes for sale. One real estate agent said the market has stalled because buyers are unable to sell their current homes and are unwilling to buy until they do so. A residential builder indicated that traffic has slowed but not stopped; however, "Good buyers are viewing homes, but they can't get comfortable about making a purchase." Another said starter homes are the most active market, but the number of potential buyers is being constrained by difficulty obtaining mortgages. Builders and agents do not predict an increase in sales for at least several quarters, and they expect the upturn to be slight.

Commercial real estate firms indicated that construction, leasing, and purchase activity continued to fall in November. A number of previously announced commercial projects have been indefinitely postponed, and work has slowed or stopped on several projects already under construction. Contacts expect commercial real estate investment and construction activity to remain at low levels as long as financial conditions continue to be uncertain.

Reports on input costs and output prices reveal a general decline since the previous Beige Book. Manufacturing firms noted a broad decrease in commodity prices for the materials they use, and many have reduced the prices of their own products in order to maintain current sales rates or minimize declines. Retailers generally reported early and steep markdowns for the upcoming holiday sales season.

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Last update: December 3, 2008