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Federal Reserve Districts

Third District--Philadelphia

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Business activity in the Third District has improved overall since the last Beige Book. Manufacturers reported strong increases in shipments and new orders in February. Retailers achieved modest year-over-year increases in sales in January and February. Motor vehicle dealers also reported year-over-year sales increases in February. Third District banks reported little overall change in loan volume outstanding since the last Beige Book, although business loan and residential mortgage volumes edged up, while consumer loan volume eased. Residential real estate agents and homebuilders indicated that activity, which was already at a seasonal low along a low part of the business cycle, was dampened further by poor weather. Contacts in the commercial real estate sector said that leasing and construction activity have remained at low levels since the last Beige Book. Service-sector firms reported that activity has increased modestly. Business contacts reported still more instances of price increases for inputs than they did in the previous Beige Book, and output price increases emerged in February as reported by contacts in several sectors.

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 increase moderately on a year-over-year basis. Bankers expect only slight growth in lending over the next two quarters. Contacts in residential real estate expect little or no increase in activity for the year as a whole. Contacts in commercial real estate expect market conditions to improve slowly during the year. Service-sector companies expect continued slow growth through the first half of 2011.

Third District manufacturers reported strong increases in shipments and new orders from January to February. Producers across a broad spectrum of 11 manufacturing sectors reported increased demand. Declines in orders were predominant only among producers of apparel and of testing and measuring instruments. Producers within the furniture, petroleum, and fabricated metals sectors reported no overall change in demand. Some manufacturers credited global markets and energy markets as drivers of new demand, and one specifically cited China's rising costs as allowing them to reclaim work previously lost overseas. Several manufacturers mentioned "tough winter conditions" as affecting shipments and lowering demand.

Third District manufacturers expect business conditions to improve during the next six months, on balance. Among the firms surveyed in February, about half expect increases in new orders and shipments, and less than one-tenth expect decreases. Executives from several sectors that supply the construction industry cited very low levels of highway construction in Pennsylvania and the Mid-Atlantic region and expressed concern over future federal and state highway funding. Capital spending plans among area manufacturers remain positive, but lessened somewhat over the past two months, mostly from January to February.

Third District retailers generally reported modest year-over-year increases in sales in January and February. Snowstorms deterred shopping and limited the advance in sales in January, retailers said, but most of those contacted for this report indicated that sales rebounded in February. However, revenue increases have been adversely affected by clearance sales of winter merchandise. The consensus among merchants in the region is that sales will continue to grow as the spring selling season gets underway. Most of the merchants who gave forecasts expect sales to increase moderately. The general opinion was expressed by one store executive who said, "We are cautiously optimistic, although we do not think the consumer will step up buying strongly until employment picks up."

Third District auto dealers contacted in February reported that sales were above the year-ago level and rising gradually from the January level. Dealers generally considered their inventories to be in line with near-term sales expectations. Dealers anticipate sales this year to exceed sales last year, although some remained concerned that further increases in gasoline prices could limit the improvement in sales.

At most of the Third District banks contacted for this report, total outstanding loan volume has been roughly level since the previous Beige Book. Overall, business loan and residential mortgage volumes outstanding have edged up at commercial banks in the District, but consumer loan volume outstanding has eased. The outlook among Third District bankers interviewed in February is that total loan volume will expand only slightly over the next two quarters. Bankers said that consumers will remain reluctant to borrow until employment begins to improve more steadily and that business firms are still focused on strengthening balance sheets rather than taking on more debt. One banker expressed a view shared by many when he said, "Creditworthy businesses are not looking to borrow."

Real Estate and Construction
Residential real estate activity remains "in the doldrums," according to builders and brokers throughout most parts of the Third District. A builder described traffic as "anemic" through January, as the typical winter lull was depressed further still by harsh weather across the District. While some builders noted a pickup in traffic in early February, the "slower-than-normal January means we won't know for awhile" whether overall trends are improving. While home prices continue to fall in most parts of the District, the softness is primarily in higher-end homes. The greater than usual prevalence of distressed property sales creates some additional competition for new homebuilders. While market participants "want to be positive," most seem to have grown weary and wary of anticipating any near-term improvement in the housing sector. They are positioned for a year of little or no growth.

There has been little change in commercial and industrial markets in the Third District since the previous Beige Book, according to area nonresidential real estate firms. Contacts said that vacancy rates and rents have been nearly steady for most property types, although vacancy rates for apartment buildings have been moving down. Contacts in some parts of the District also reported some slight gains in occupancy of industrial buildings. Construction activity has been roughly steady at a slow pace. Looking ahead, commercial real estate contacts expect market conditions to improve slowly during the rest of the year, with increases in construction and occupied space held back by restrained financing and slow employment growth in the region. One contact said, "It will probably take some office markets several years to recover the loss of occupancy caused by the recession."

Service-sector firms generally reported modest increases in activity since the previous Beige Book. Business-service firms generally have been posting slight gains as their customers see gradual improvement in their own activity. However, as one business-service firm noted, "Customers are keeping within their budgets, and we have to be responsive to that." Moderate improvement was also noted by firms in the telecommunications, professional services, and health care sectors. Most of the services sector firms contacted for this report expect slow growth in the months ahead.

Prices and Wages
Reports from manufacturers since the previous Beige Book indicated still more pervasive increases in input costs. While much less prevalent, output price increases are becoming more widespread throughout the manufacturing sectors. Retailers generally indicated that selling prices have been steady or declining as they clear out winter merchandise. However, a growing number of retailers mentioned that wholesale costs are rising for goods they are purchasing for sale during the second half of the year.

Business firms in the region reported mostly steady wages since the last Beige Book, although some said they have raised wages and salaries for certain skilled occupations. Employment agencies said there has been some growth in demand for workers recently, and some colleges in the region reported that more companies plan to recruit on campus this year than last year.

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Last update: March 2, 2011