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Federal Reserve Districts

Third District--Philadelphia

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Economic conditions improved in some sectors in the Third District and have been about steady in others since the last Beige Book. Manufacturers, on balance, reported increases in shipments and new orders. Retailers indicated that a rising sales trend was interrupted by snowstorms in February. Motor vehicle dealers indicated that sales have been increasing slightly but were also hampered by snowstorms. Third District banks reported steady loan volume outstanding. Residential real estate agents and home builders said demand for homes has been on the rise, but February snowstorms adversely impacted construction and sales. Nonresidential real estate leasing, purchase, and construction activity continued to be weak. Service-sector firms generally reported steady activity. Business firms in the region indicated that prices of most goods and services have been steady, although there were reports of price increases for metals and some industrial products.

The outlook among Third District business contacts is that business conditions will improve slowly in most sectors in the months ahead. Manufacturers forecast a rise in shipments and orders during the next six months, on balance. Retailers expect sales to expand slowly as overall economic conditions improve. Auto dealers expect sales this year to be slightly above the level achieved last year. Bankers expect only slight increases in lending. Residential real estate contacts expect home sales to be boosted in the short term by the homebuyer credit, but they expect just a slow increase in sales after the expiration of the tax benefit. Contacts in nonresidential real estate expect leasing to advance as landlords reduce rents, but they expect construction to remain soft through most of the year. Service-sector firms generally anticipate slow growth in the near term.

Third District manufacturers reported increases in shipments and new orders, on balance, from January to February, with the number of firms posting gains exceeding the number recording declines by a fair margin. The improvement was also widespread, as most of the major manufacturing industries in the region posted increases. Comments from manufacturers indicated that their customers are beginning to step up orders after a period of slow activity. One contact said that "for the first time in 16 months there is slight optimism among our customer base," and another said that "we are ramping up to handle a few large projects." However, the overall expansion in manufacturing activity since the last Beige Book was constrained somewhat by production interruptions resulting from snowstorms during February.

Third District manufacturers expect business conditions to improve during the next six months, on balance. Among the firms polled in February, about half expect increases in new orders and shipments through the middle of the year; about one-tenth expect decreases. Capital spending plans among area manufacturers have improved since the last Beige Book. About one-third of the firms polled in February plan to increase expenditures for new plant and equipment, although one-half plan to maintain level spending. Despite the general improvement in current and expected conditions in the region's manufacturing sector, some firms said further gains could be limited by continuing tightness in credit markets and adverse developments in regard to taxes and regulations.

Third District retailers reported that February snowstorms hampered shopping, offsetting a marginally rising sales trend. As a result, many of the stores contacted for this report said they will likely post month-to-month and year-to-year decreases in sales for February. Retail contacts generally indicated that, except for the snowstorms, sales have been moving up slowly. Most cautioned, however, that a strong growth trend is not imminent. One store executive said sales were "just turning the corner" toward improvement. Looking ahead, Third District retailers generally expect only slow growth in sales for some time. One retailer said, "Sales will be on a plateau until employment picks up."

Third District auto dealers reported a slight improvement in sales since the last Beige Book, but a negative impact from February snowstorms. Looking ahead, dealers continue to expect total sales for this year to be slightly ahead of last year.

Total outstanding loan volume at Third District banks has been virtually level since the last Beige Book, according to bankers contacted for this report. On balance, commercial bank lending officers said slight increases in business loans and real estate loans were being offset by decreases in consumer loans. Several banks indicated that loan delinquencies have been about steady in recent weeks, although credit quality remained a concern. One banker said, "Credit quality is holding its own, but we are concerned that some borrowers will not be able to stay current beyond the first quarter."

Third District bankers see some signs of loan growth ahead. Some reported increased inquiries about business loans. However, in general, bankers in the region expect consumer loan demand to remain soft, and they expect tight credit standards to limit expansion in lending of all types.

Real Estate and Construction
Sales of new and existing homes have picked up somewhat since the last Beige Book. Local real estate agents and home builders said the homebuyer tax credit was providing some impetus to sales, especially in the lower- and moderate-price segments of the market. Some builders have started speculative construction of houses to attract buyers who wish to take advantage of the tax credit before its expiration. However, snowstorms in February interrupted construction as well as sales, according to builders and real estate agents. Real estate agents said the inventory of homes listed for sale remained high, and sales prices have been steady to down across the region. Residential real estate contacts expect sales to rise seasonally in the spring, but several cautioned that sales might decline when the tax credit expires. Looking beyond that date, one agent said, "We are predicting a slow recovery in sales."

Nonresidential real estate firms indicated that leasing, purchase, and construction activity remained slow, but there have been some slight increases in the sales of commercial buildings in some parts of the region. Contacts reported that vacancy rates have been about steady since the last Beige Book report, but effective rents have continued to decline. Much of the recent leasing activity has been for relatively small blocks of office space, according to agents, who say that tenants are reluctant to commit for large blocks of office space. Contacts reported a slight increase in leasing of industrial space, but they said the demand for retail space has remained weak. Contacts expect nonresidential real estate markets to remain soft through at least mid-2010, by which time improvement is expected in some, but not all markets. A contact in office markets said that "significantly reduced rental rates will be influential" in stimulating leasing activity in office markets, but a contact in industrial markets said that sector will be "tested" in 2010.

Service-sector firms generally reported that activity has been about steady since the last Beige Book. Some indicated a slight strengthening in demand for their services, which some described as only "stabilization" or "an uptick." Some engineering firms noted that they have had increases in demand for work related to energy conservation and efficiency, but other construction-related activity continued to be very weak. The region's service-sector firms expect slow growth, at best, in the near term. One noted that "clients are starting to talk about projects they have had on the shelf, but they're not doing anything yet," and another said, "We continue to be cautious."

Reports on input costs and output prices have been mixed since the last Beige Book. A number of manufacturing firms noted increases in costs of the commodities they use. Most continued to report that they have not raised the prices of the products they make, although producers of metals and some types of industrial machinery have raised prices. Retailers reported mostly flat selling prices.

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Last update: March 3, 2010