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Federal Reserve Districts

Third District--Philadelphia

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Business conditions in the Third District have been mixed since the last Beige Book. Manufacturers, on balance, reported slight decreases in shipments and new orders in August. Retailers posted seasonal increases in sales as well as year-over-year gains. Motor vehicle dealers also generally posted year-over-year gains but indicated that sales have been only steady in recent weeks. Third District banks reported steady loan volume outstanding in the past few weeks. Residential real estate agents and homebuilders said that there has been no rebound from the sharp drop in home sales that followed the expiration of the federal tax credit for purchases. Contacts in the commercial real estate sector said there has been practically no change since the last Beige Book in the generally weak market conditions around the District. Service-sector firms reported mostly flat or very slight increases in activity since mid-summer. Business firms in the region indicated that prices of most goods and services have been steady, although there continued to be reports of increased prices for some metals and wood products. Several retailers said they were receiving indications from suppliers that wholesale prices will be increased toward the end of the year.

The outlook among Third District business contacts is positive but not strong. Manufacturers forecast a rise in shipments and orders during the next six months. Retailers expect sales to expand slightly but see no signs that the pace of growth will quicken. Bankers expect little or no growth in lending in the near term. Contacts in both residential and commercial real estate expect flat activity during the rest of the year. Service-sector companies expect slow growth for the rest of the year.

Third District manufacturers reported slight decreases in shipments and new orders from July to August, on balance, as well as a decrease in order backlogs. Slower activity was reported in most of the major manufacturing sectors in the District. However, producers of wood products, food products, industrial materials, and measuring and testing equipment reported increased demand for their products.

Third District manufacturers expect business conditions to improve during the next six months, on balance. Among the firms surveyed in August, about 40 percent expect increases in new orders and shipments, and about 20 percent expect decreases. Capital spending plans among area manufacturers remain positive, overall, but are not strong. About one-third of the firms polled in August plan to increase expenditures for new plant and equipment, and about one-fifth expect to reduce spending. Several manufacturing executives indicated that uncertainties about economic conditions and policies were deterring advances in business activity. One noted that, "There is no sign of sustainable improvement in demand, so we remain cautious about inventories, capital spending, and hiring." Another said, "Investment spending is not increasing because of concern about tax increases on business owners."

Third District retailers reported that sales rose from July to August for the back-to-school shopping period, and most of the stores surveyed posted year-over-year gains for the period. Store executives continued to note that much of the year-over-year improvement in sales has been a consequence of last year's poor results; nevertheless, many said the fundamental trend in sales was beginning to strengthen. Some merchants noted relatively healthy sales of apparel and small appliances, albeit with significant discounting, but weak sales of big-ticket consumer electronic products. Most store executives described inventories as being in line with current and expected sales. Looking ahead, most of the retailers contacted for this report said they expected modest growth in sales through the end of the year. The consensus was reflected in the comment of one store executive, "We are in a recovery, but it will not get stronger until employment increases."

Third District auto dealers reported roughly steady sales during July and August at a rate somewhat above the year-ago pace. Dealers expect sales to continue to run at about the current rate for the rest of the year. However, some dealers said manufacturers' incentives are supporting sales of current model-year vehicles, and sales could slip when that supply is depleted and replaced by new model-year vehicles.

Tourism officials and industry executives in the region generally reported increased activity compared with last year, although most noted that overall business remained below the levels of 2007 and 2008. Contacts indicated that travel and tourism revenue was only modestly above the year-ago level as lower spending per person partially offset increased numbers of people visiting the region's tourist attractions.

Total outstanding loan volume at most of the Third District banks contacted for this report has been virtually level since the last Beige Book. Commercial bank lending officers said there has been a slight increase in credit extended on home equity lines, but practically no change in outstandings in other credit categories. Bankers continued to report low demand for both consumer and business loans. "It's still a deleveraging story," one banker said. Commercial bank officers indicated that credit quality has been steady or has improved slightly since the last Beige Book.

Looking ahead, Third District bankers expect little, if any, growth until both consumer and business confidence strengthen. Some bankers said business lending could begin to move up in the near term, but the consensus was that loan growth overall will be slight until there are clear signs that economic conditions are improving.

Real Estate and Construction
Contacts in residential real estate markets reported that the low rate of sales that took hold after the expiration of the federal income tax credit for home purchases has persisted into July and August for both new and existing homes. For both new and existing homes, contacts reported little change in prices, and they noted that lower-priced homes continued to sell at a relatively better pace than higher-priced homes. Residential real estate contacts expect sales to remain slow during the fall and winter. Although the inventory of homes for sale has not changed much recently, some contacts expect an increase in the spring of next year. One agent said, "A lot of people who don't need to sell right now have taken their homes off the market, and they will probably jump back in as soon as the market appears to be coming back."

Nonresidential real estate firms indicated that there has been little change in commercial and industrial markets since the last Beige Book. Contacts reported that purchases of income-producing properties by investors have picked up somewhat, but they said that commercial construction activity remains very slow, and there are few, if any, indications that new projects will be started in the near future. Commercial real estate contacts expect market conditions to show little change for at least the rest of the year. They believe that recent increases in available space are likely to restrain lease rates and, as one said, "Put a damper on future construction."

Service-sector firms generally reported minimal gains or flat rates of activity since the previous Beige Book. A large business services firm reported that client companies were not contracting for as much business as they had indicated earlier in the year. Several health-care organizations noted recent flattening in activity that is interrupting a long growth trend. In contrast, some temporary employment agencies noted that demand had picked up recently. Looking ahead, most of the services firms contacted for this report expect growth to be slow for the rest of the year. Some have reduced their forecasts; as one contact said, "It looks like we were a little too optimistic earlier this year."

Prices and Wages
Reports on input costs and output prices indicate little change since the last Beige Book. Most of the manufacturing firms polled in August reported no change from July in the costs of the commodities they use or the products they make. However, producers of primary metals and wood products raised prices. Construction firms gave mixed reports on prices, with some noting steady materials costs and some indicating increases for a variety of materials. Retailers generally noted that both wholesale costs and retail prices have been mostly steady, although several indicated that they expect wholesale price increases from their suppliers during the fourth quarter of this year.

Business firms in the region reported no significant change in wages. Employment agencies reported that client companies have begun to fill positions that have been open but do not appear to be adding employees. Some staffing firms said client companies are looking to rely more on temporary and contract workers to meet variable and uncertain workloads, rather than hiring permanent employees.

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Last update: September 8, 2010