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Federal Reserve Districts

Third District--Philadelphia

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Economic conditions in the Third District showed little change from July to August, although there were a few scattered signs of improvement. Manufacturers, on balance, reported a steady rate of shipments and a slight increase in new orders. Retailers indicated that sales of back-to-school merchandise had picked up, although the overall sales pace remained soft. Motor vehicle dealers indicated that sales of new vehicles rose from July to August, although they remained below the year-ago pace. Third District banks reported level loan volume, overall, and further declines in credit quality. Residential real estate agents generally noted steady sales of existing homes, although they noted that the sales rate remained below the year-ago pace. Nonresidential real estate leasing and construction activity continued to be slow. Service sector firms reported mainly steady activity at a slow pace. Business firms in the region reported mostly level input costs and output prices in August, although they noted some increases compared with July.

The outlook in the Third District business community was slightly better in August than at the time of the previous Beige Book. Although most contacts do not expect strong improvement in the immediate future, some now believe economic conditions are beginning to stabilize and that a slow pickup in activity might get under way in the near term. Manufacturers forecast a rise in shipments and orders during the next six months. Retailers are generally cautious, expecting only slight sales gains in the rest of the year. Auto dealers think sales will ease in the short term, but they believe that the sales rate might be better in the later part of the year than it was in the first half. Bankers anticipate demand for credit to remain soft as businesses and individuals continue to reduce indebtedness. Residential real estate contacts believe housing demand will continue to stabilize, although they expect only a slight improvement in market conditions during the rest of the year. Contacts in nonresidential real estate expect leasing and construction to remain weak during the rest of this year.

Third District manufacturers reported a steady pace of shipments and a slight increase in new orders, on balance, from July to August. Although the rise in demand for area manufacturers' products has been slight, it has been fairly widespread among the District's major manufacturing sectors. Some firms indicated that the increase in orders reflected inventory restocking by their customers, and some firms noted that they were gaining new customers as competitors have gone out of business.

Third District manufacturers forecast further gains, on balance. Among firms polled in August, slightly more than half expect new orders and shipments to increase during the next six months; less than one-tenth expect decreases. Although the number of firms expecting improvement has increased, most expect gains to be slight. For example, one firm said that "improvement will be moderate" and another remarked that "future projections are positive but we have no idea when overall conditions will improve." Capital spending plans among area manufacturers remain restrained. On balance, area firms plan just steady spending for new plant and equipment during the next six months. Manufacturers cited a variety of reasons for holding back on expansion plans, including slack demand for their products, difficulty in obtaining financing, and concern about possible future tax increases or federally legislated health insurance mandates.

Third District retailers reported a gradual rise in sales for the back-to-school shopping period in August. Sales of youth apparel were generally described as solid or strong, but sales of other lines of merchandise remained soft. Merchants said consumers' purchases have been "value-driven" and focused on immediate needs. Several retailers said consumers appeared to be cutting back on purchases of other goods to pay for back-to-school items. Most of the retailers contacted for this report said the late summer pace of overall sales has been below the sales rate during the same period last year. Third District retailers have mostly cautious views of the near term. They do not expect significant improvement in sales in the final months of the year, and they are strictly limiting inventories.

Third District auto dealers reported that the cash-for-clunkers program gave sales of new vehicles a strong boost in August compared with July, although sales for the month were below sales in August of last year. Dealers also said increased showroom traffic resulted in higher sales in August than in July of vehicles not eligible for the program. The sales spurt reduced dealers' inventories significantly. Looking ahead, dealers said sales could slip as a result of depleted inventories and the end of the rebate program, but they expect manufacturers to step up production and introduce incentives to maintain sales momentum.

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 gain in consumer lending, but residential real estate lending and business lending have eased slightly. Most of the bankers contacted for this report said that demand for credit has been slack because both consumers and businesses are reluctant to add to indebtedness. However, some banks continued to tighten credit standards. One banker noted that "we are being more selective" in lending, and posting slower loan growth as a result. Most of the banks contacted in August said that credit quality continued to deteriorate for all categories of lending. Bankers generally expect demand for credit to remain weak in the near term as individuals remain focused on building up savings and businesses continue to reduce leverage.

Real Estate and Construction
Sales of existing homes in the Third District in July and August were fairly steady, according to local real estate agents. They generally indicated that a seasonally higher rate of sales that began in the spring remained on track; however, the sales rate remained well below the pace set in the past few years. The increase in sales has been more robust in the lower price ranges in most of the District, although agents in a few areas said there had been a recent upturn in sales of higher-priced homes. Nonetheless, throughout the District selling prices continued to run well below the levels achieved in the past two to three years. Real estate agents generally indicated that they believe the market is stabilizing, but they do not expect much strengthening in sales. One agent commented that "we're just starting to see the market turn around," and another said "I don't see a big upturn in the rest of the year." Residential builders reported a slight increase in sales from July to August. One builder's comment was representative of most others: "Traffic at our sites hasn't increased, but the people who show up are more serious about buying." Builders believe consumer confidence is improving, bolstering the rise in home purchases. However, they expect the increase to be gradual. According to area real estate contacts, prices of existing homes have been mostly steady, while prices of new homes have firmed up slightly in the past few months.

Nonresidential real estate firms indicated that leasing and purchase activity continued to be slow and that vacancy rates continued to rise for office, industrial, and retail buildings. There has also been an increase in sublease space coming on the market. Rents have declined. Several contacts noted that landlords have been focusing on maintaining occupancy and limiting rent declines in the face of "stagnant" or "nonexistent" demand for new space. Contacts also indicated that commercial real estate financing remained very difficult as secondary markets show no signs of recovery. Contacts expect nonresidential real estate leasing to remain weak into next year, and they see no signs that construction will strengthen in the near future.

Service-sector firms reported little change in business conditions in August compared with July. In general, business services firms indicated that activity continued to be slow, although some that had reported declining activity earlier in the year said the slowdown appeared to be abating. Employment agencies reported a recent increase in demand for temporary workers, but they said demand for permanent employees had not yet picked up. The region's service-sector firms generally expect very slow improvement in business conditions during the rest of this year and next year.

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, particularly metals and some other industrial materials. On balance, manufacturers have kept the prices of their own products steady. Retailers indicated that their cost of goods has been about steady, and they have kept selling prices in check, as well. Auto dealers reported some firming in transactions prices during the cash-for-clunkers sales rush. Some home builders reported rising construction costs due to increased local government permit fees.

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Last update: September 9, 2009