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Federal Reserve Districts

Third District--Philadelphia

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Business activity in the Third District has returned to a path of slow overall growth since the previous Beige Book. Following unusual weather disruptions from an earthquake, a hurricane, and a tropical storm during late summer, the region was visited again � this time by a rare early season snowstorm. The weekend storm caused widespread electric utility outages and disrupted business, but the cold weather ultimately triggered shoppers' interest for the winter season. Since the last Beige Book, manufacturing activity has grown modestly, but steadily. Retailers reported renewed growth in year-over-year sales. Motor vehicle dealers experienced strong year-over-year sales growth; however, Thailand's recent widespread flooding has caused another supply disruption of auto parts. Third District banks have reported slight growth in loan volume outstanding since the last Beige Book. On balance, new home sales continued below year-ago levels, while construction activity strengthened since the last Beige Book. Reports from commercial real estate contacts were more mixed by sector and location, but slightly positive overall. Service-sector firms reported generally modest growth. Price pressures remained contained for most sectors but continued to strain profit margins in all but a few sectors.

Most Third District business contacts had already lowered their expectations over the past few months--projecting slow to flat growth through year-end. Ongoing uncertainty since the previous Beige Book has not significantly altered their outlook. Manufacturers still expect a modest rise in shipments and orders during the next six months. Retailers are hopeful for stronger sales, and auto dealers are uncertain; both have lean inventory plans. Most banking and residential real estate contacts had lowered their expectations before the last Beige Book. Commercial real estate contacts and service-sector firms continue to plan for slow growth; however, uncertainty has increased.

Since the last Beige Book, Third District manufacturers have reported modest increases in new orders and shipments. However, the improvement was uneven across and within sectors. Steady, modest growth was reported by various firms that supply or serve manufacturers. These firms expect continued overall growth from their manufacturing clients, despite citing ongoing small factory closures. Firms experiencing growth often cited business returning from China and India, or other market share gains. Other firms cited growth from Marcellus shale gas activity or from new product launches. Factors cited as impeding growth included underfunded public infrastructure, work going to China and India, and ongoing political uncertainty. The makers of food products, lumber and wood products, and primary metals reported declining product demand. Much of their decline is seasonal; they retained positive expectations.

Third District manufacturers expect business conditions to improve during the next six months, despite persistent uncertainties. Since the last Beige Book, the general outlook has improved substantially, with few firms expecting a decline, while most are divided between no change and some increase. Expectations of capital spending and future hiring have nearly doubled among area manufacturers.

Third District retailers reported October sales gains compared with September as well as with year-ago levels. Cold weather and an early snowstorm triggered buying of sweaters and other cold weather gear. Prospects for holiday sales vary with the market segment. High-end, online, and outlet retailers are most optimistic. However, a concern was expressed over supply disruptions to some consumer electronics from the flooding in Thailand. Beyond the holiday season, a conventional mall retail contact expects sales to be down in 2012 from 2011, while an outlet mall contact anticipates new mall openings in the fall of 2012 and in 2013.

Auto sales continued to grow steadily in October, according to Third District auto dealers. The sellers' market also continued � boosting profits � as used cars remained scarce and as supply disruptions are recurring for Honda and Toyota, this time from Thailand's floods. Inventories remained lean. Pent-up demand for Japanese models may delay a return to normal price competition until well after supply has normalized.

Third District bankers have reported slight overall growth in loan volumes since the previous Beige Book. However, one banker described margins being squeezed as banks compete for share in a flat market. Another indicated they were picking up loans as foreign banks retreated from the market. Prompted by low interest rates, the strongest loan growth occurred in commercial real estate, home equities, and home mortgages, especially refinancings. C&I lending was flat. Credit quality continues to improve but at a slower rate. Among Third District bankers interviewed in November, business plans for 2012 assume further modest loan growth and challenging competition within markets.

Real Estate and Construction
Residential building activity has increased somewhat since the previous Beige Book, while reports on existing homes sales indicated no change. Existing sales remain lower than last year's levels. Large print ads recently touted record low interest rates, low prices, and high affordability, possibly prompting the flurry of activity noted by one New Jersey builder. Buyers selected mostly a range of mid- to high-priced build-to-suit homes. These price points were also strong for a Pennsylvania builder as were lower-priced multifamily townhomes aimed at move-up and entry-level buyers. One builder noted that producers of many construction materials have shut down and that the supply stream will require 12 to 18 months to start up again after demand for residential construction picks up. There is no change in the relatively weak outlook among builders and real estate agents.

Nonresidential real estate sectors reported mixed results with leasing strength in select markets but few gains in construction. Investment interest has strengthened in multifamily properties, while leasing activity grew for trophy office space (desired by large legal firms) and for research facilities (for new and expanding biotechnology firms). Demand for retail space continues to weaken. Public infrastructure spending remains low. Beyond generally weak demand, an architect cites regulatory burdens for permits and financing as barriers. New construction or renovation plans are mostly limited to institutional, life sciences, multifamily, and warehousing sectors in select markets. Some construction activity for warehousing represents site relocations within the three-state region. Construction/maintenance work has also slowed in advance of three anticipated oil refinery shutdowns. The overall outlook for demand of nonresidential space is for continued slow growth.

Third District service-sector firms have reported modest growth since the last Beige Book. Advertising was noted as a little soft with a particular weakness in retail. Freight volumes continue to grow, reaching pre-recession levels, according to a logistics firm. Staffing firms indicated that demand is slowing and that virtually all new placements are on a temporary or contract basis, rather than permanent, full-time hires. High-skilled workers, ranging from welders to new hires with business intelligence skills, remain in short supply. Staffing contacts expected little or no improvement by year's end; one was also less bullish for 2012.

Prices and Wages
Few price changes have been reported since the previous Beige Book. One broad business sector supplier announced widespread price hikes for early December. Pricing power remains favorable for freight shippers and auto dealers. Most other sectors report very tight margins, although cost factors have generally remained flat. A few exceptions include cotton products for retailers and drywall for builders. Many bankers, builders, and leasing agents continued to report expectations for concessions from borrowers, buyers, and renters, respectively. Staffing firms reported no upward pressure on wages.

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Last update: November 30, 2011