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Federal Reserve Districts

Third District--Philadelphia

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Economic activity in the Third District continued at a slow rate in May. Manufacturers, on balance, reported declines in shipments and new orders. Retailers gave mixed reports, noting gains in sales during the month at discount stores but weakening sales at stores selling higher-priced merchandise. Motor vehicle dealers indicated that sales remained sluggish. Bank loan volume has been level in recent weeks, and credit quality has continued to deteriorate. Residential real estate sales showed a slight seasonal gain in May but remained below the level of a year ago. Nonresidential real estate investment and construction activity continued to be slow. Service-sector activity has been generally slow in recent weeks. Business firms in the region reported level or falling input costs and output prices in May.

The outlook in the Third District improved slightly in May. Although contacts do not foresee substantial increases in activity in the near term, more now believe the decline in economic activity might be near a bottom. Manufacturers forecast a rise in shipments and orders during the next six months. Retailers expect sales to gain strength slowly, but auto dealers expect sales to remain slow for the rest of the year. Bankers anticipate little growth in lending. Residential real estate agents and home builders believe market conditions might be stabilizing, but they do not expect sales to move up solidly until next year. Contacts in nonresidential real estate expect leasing and purchase activity to remain weak during the balance of the year but perhaps move up somewhat during the fourth quarter. Service-sector firms expect activity to be slow during the next few months, at least.

Third District manufacturers reported declines in shipments and new orders, on balance, from April to May at about the same rate as the decline from March to April. Around 40 percent of the manufacturers surveyed noted decreases in both measures, and around 20 percent reported increases. Among the District's major manufacturing sectors demand remains especially weak for primary metals, industrial machinery, and electrical equipment. In contrast, producers of furniture, metal products, and industrial materials reported some increases in orders during May.

The outlook among Third District manufacturers is positive despite the current weakness, and the level of optimism has improved since the last Beige Book. Among firms polled in May, around one-half expect new orders and shipments to increase during the next six months and around one-tenth expect decreases. However, most of the manufacturers surveyed in May expect recovery to be slow and uneven. Typical comments are "the business outlook is very uncertain," and "sales improvement will be small."

Third District retailers gave mixed reports on sales in May. Discounters and other low-priced stores indicated that sales improved somewhat during the month, but stores selling luxury brands and higher price-point merchandise generally reported continuing sluggishness in sales. The chief executive of a large chain store said, "We are a value proposition, so we are benefitting from uncertain economic times." In contrast, an executive at a high-fashion chain store said, "Luxury is in the tank." Retailers in the region generally do not expect a strong improvement in sales during the rest of this year. Most are of the opinion that consumers will not step up spending significantly until economic conditions in general, and employment in particular, rebound.

Third District auto dealers reported that sales remained very sluggish in May. Dealers said demand for motor vehicles continued to be hampered by weak economic conditions, limits on the availability of financing for vehicle purchases, and consumers' concern about the future of domestic automobile manufacturers. Dealers expect sales to remain slow for the rest of the year, and they expect closings and consolidation among dealerships to increase during the balance of this year and into next year.

Total outstanding loan volume at Third District banks has been nearly level in recent weeks, according to bankers contacted for this report. There has been a small increase in consumer credit but decreases in commercial and industrial lending and residential mortgages. The slowness in business lending reflected a general slowdown in expansion by firms, according to bank lending officers, as well as what one described as "a lack of credit-worthy business borrowers." Most of the banks contacted in May said that credit quality continued to deteriorate for all categories of lending. Banks have stepped up sales of repossessed real estate, and they have increased efforts to resolve nonperforming commercial loans. Bankers generally expect demand for credit to remain restrained for the near term, although some think loan growth could resume slowly toward the end of the year.

Real Estate and Construction
Residential real estate activity in the Third District in May remained well below the level of a year ago, although residential real estate agents and builders reported a seasonal pickup in sales. Real estate agents generally indicated that the sales increase has been relatively greater for lower-priced houses than for more expensive houses. One agent explained, "The lower-price range is more active now, with a boost from the first-time buyer tax credit." Agents reported declining inventories of both new and existing houses in some parts of the region, but in most areas the number of days houses are on the market before being sold has been unchanged since the winter. Builders and real estate agents continued to describe current market conditions as "stabilizing" rather than rebounding. Most of those contacted for this report do not expect a solid upturn in residential sales or construction until next year.

Nonresidential real estate firms indicated that construction, leasing, and purchase activity remained low in April and May. Vacancy rates in office and industrial buildings have been rising. Economic uncertainty has prompted "short-term transactions, downsizing, and consolidation of existing spaces," according to one contact. Rental rates have been easing, with greater declines in Class B than Class A buildings, according to leasing agents. Contacts expect nonresidential real estate leasing and construction activity to remain weak through the rest of the year, but some believe that lack of new construction could result in a tightening in the market by the end of the year.

Service-sector firms reported a continuation of slow activity since the last Beige Book. Firms that provide services to the construction and real estate sectors reported declines in business and reductions in employment. The region's service-sector firms generally anticipate that soft conditions will persist for most of the balance of the year. Some business service firms said they expect business to improve next year, and a few said they were making plans to expand by making acquisitions or by extending the range of services they offer.

Reports on input costs and output prices indicate mostly steady or falling prices since the last Beige Book. Manufacturing firms noted decreases for most of the materials they use as well as the products they make. Construction firms said the prices of most building materials have been steady, although there have been recent increases for a limited number of products. Retailers indicated that their cost of goods has been about steady, and they have kept selling prices in check. Several contacts noted that there has been an increased effort to reduce costs in their industries. For example, a retailer said suppliers of some merchandise have eliminated certain features or substituted less expensive materials in their products, and a builder noted that he has redesigned some houses to reduce material and labor costs.

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Last update: June 10, 2009