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Federal Reserve Districts

Third District--Philadelphia

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Overall, business activity in the Third District has grown at a somewhat faster pace compared with the previous Beige Book. The overall sentiment has been more positive, although the very mild winter weather may have played a part. Since the last Beige Book, manufacturing activity has grown further with more broad sectors contributing to the gain. Retail sales maintained steady year-over-year increases. Motor vehicle dealers experienced unseasonably strong sales growth overall; however, results varied by state. Third District banks have reported slight growth in lending and continued improvement of credit quality since the last Beige Book. New home construction started the year strong with the warm weather assist. Commercial real estate contacts continued to report steadily improving markets for industrial, retail, and office space. Overall, service-sector firms reported continued growth. Price pressures have remained contained for most sectors, with little change from the last Beige Book.

Most firms have expressed a brighter outlook since the last Beige Book. Manufacturers anticipate rising shipments and orders during the next six months. Retailers expect slightly stronger sales, and auto dealers are increasingly confident that the current surge in sales will carry into the spring selling season. Banking, real estate, and service-sector firms continue to plan for slow growth in 2012. In general, contacts seemed to prefer talking about recent positive trends rather than reiterating their uncertainty. However, their concerns continue to include the ongoing slow housing recovery, Europe's economic problems, and federal budget indecisions.

Since the last Beige Book, Third District manufacturers have reported further increases in new orders and shipments. Gains were widespread among the makers of food products, lumber and wood products, primary metals, instruments, and electronic equipment. A supplier to the broad industrial market stated that demand accelerated over the past several months and that the production capacity of many manufacturing clients was picking up. Contacts also reported that work was returning from overseas and that foundries were reaching capacity. The primary metals sector reported strong demand from the automotive and heavy equipment sectors. Among the makers of instruments and of electrical machinery, some contacts indicated that the level of demand seen recently has been the highest since near the beginning of the recession. Even the housing sector contributed to slight upticks in demand, according to contacts from two firms that produce housing-related products.

About nine out of 10 Third District manufacturers expect business conditions to improve or stay the same during the next six months; most expect their business to increase. This optimism permeates nearly every broad manufacturing sector. Increasingly, our contacts cite signs of stronger economic growth, although some of the expected increase reflects seasonal trends. Risks from Europe's problems and constraints from a weak housing market continued to add uncertainty to the outlook, according to some contacts. Expectations of capital spending and future hiring have strengthened since the last Beige Book.

Third District retailers reported little drop-off from the holiday shopping season -- maintaining steady year-over-year sales increases. One industry contact reported better than normal sales for January; another reported perceptible, gradual improvement. All contacts conceded that the mild winter weather may have increased activity, although sales of winter clothes and gear have suffered. Price competition remains tough and shoppers are still very budget conscious, according to some contacts. Overall, retail contacts were a bit more optimistic but remain cautious.

Auto sales strengthened further in January and February, especially for Pennsylvania dealers. New Jersey dealers had a stronger December, which may have pulled sales forward from January; this was in part due to financial-sector workers spending their year-end bonuses. The outlook for auto sales remains very strong. Industry contacts indicated that some larger dealers have begun hiring, mostly in sales. More hiring is expected if robust sales continue into the spring season.

Overall, loan volumes were flat to up slightly in the Third District since the previous Beige Book. The issuance of home equity lines and home mortgages, including refinancing, increased the most, although some contacts were unwilling to write 30-year mortgages at the current low rates. Commercial real estate and C&I lending remained flat. Banking contacts reported low demand for some lines and early paydowns in others. Overall, credit quality continued to improve. One financial contact reported that the pace of loans going into delinquency has slowed, although the rate being resolved by foreclosure or workout remained flat.

Real Estate and Construction
Residential builders reported strong activity and sales in January and early February. One Pennsylvania builder said it was the strongest January in several years. A New Jersey builder closed deals that had been initiated in November and then dragged through December; the builder also reports a good backlog of sales. The mild winter weather helped with production and may have boosted traffic. Contacts cited a more active resale market as a positive trend but expressed concern over higher gas prices and increased compliance costs in the mortgage market. A residential broker also reported a stronger January than last year. Builders reported hiring some sales staff. The outlook among builders and brokers is modestly more positive. However, a broker cautioned that increased sales activity will first spur the shadow inventory to emerge and add to the active inventory, before the active inventory can begin to shrink.

Brokers and managers of nonresidential real estate have reported generally improving conditions for industrial, retail, and office space since the last Beige Book. The industrial market remains strong, and gains are spreading to the weaker South Jersey market area. High-end and low-end retail markets are especially strong. Mid-value retail, including grocery stores, which often locate in community shopping centers and street retail properties, is struggling, producing higher vacancies. Office market contacts reported that signs of pent-up demand are emerging that will lead to positive net absorption by year's end. The overall outlook for nonresidential real estate has improved since the last Beige Book, but growth will remain modest.

Third District service-sector firms generally have reported further growth since the last Beige Book. A logistics firm reported very strong year-over-year results through the first six weeks of 2012. Despite some expressed concerns, the contact is hopeful that this strong pace is maintained or improves when "freight season" begins in March. Though somewhat skeptical of the sudden surge in confidence and market enthusiasm, one contact quipped, "I won't fight the tide!" Advertising dollars are expected to build through the year with the Olympics and the presidential election. One staffing firm reported a surprising dip in new orders compared with last year and a shift to short-term orders that are not indicative of growth. The majority of service-sector firms anticipate growth will steadily improve in 2012.

Prices and Wages
Price levels have remained contained since the previous Beige Book. Auto dealers and freight shippers still command favorable pricing power. Price pressures are mixed among manufacturing firms, with some firms unable to pass their higher costs along. Retailers and homebuilders continue to report tight margins. Wages are reported to be flat, and some firms have substituted lower cost temporary contract workers to reduce their overall wage bill. House prices are expected to fall further; however, nonresidential rents are stabilizing and concessions are scarcer.

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Last update: February 29, 2012