The following is the text of the Federal Reserve Board’s Third District -- Philadelphia.
Business activity in the Third District has been varied across sectors since the last Beige Book. Manufacturers, on balance, reported increases in shipments and new orders in November. Retailers have been making year-over-year gains in sales. Motor vehicle dealers have also posted year-to-year sales increases. Third District banks reported practically unchanged loan volume outstanding since the last Beige Book. Residential real estate agents and homebuilders indicated that the recent sales trend has been downward. Contacts in the commercial real estate sector said market conditions remain soft. Service-sector firms reported that activity has been roughly steady in the past month. Business contacts indicated that prices of most goods and services have shown no change, although retailers noted recent increases in prices for goods ordered from foreign suppliers.
Most Third District business contacts foresee slow improvement ahead. Manufacturers forecast a rise in shipments and orders during the next six months. Retailers expect sales for this year’s holiday shopping period to exceed sales for the same period last year. Bankers expect just slow growth in lending in the next few months. Contacts in residential real estate expect activity to move up slowly, at best, but contacts in commercial real estate do not anticipate a meaningful change from current soft conditions in the near future. Service-sector companies expect slow growth from now into next year.
Third District manufacturers reported increases in shipments and new orders from October to November, on balance. However, the improvement was uneven among the region’s major manufacturing industries. Increases in demand for their products was more common among makers of furniture, industrial materials, and testing and measuring instruments, but makers of construction-related goods continued to see flat or declining demand for their products. Manufacturers in general continued to report that the flow of new orders has been variable. One said, “You don’t know from one week to the next what the workload will be.” Another said, “Conditions continue to be choppy.”
Third District manufacturers expect business conditions to improve during the next six months, on balance. Among the firms surveyed in November, about half expect increases in new orders and shipments, and about one-fifth expect decreases. Capital spending plans among area manufacturers have increased somewhat in recent months, although many noted that implementation of new plant or equipment is primarily to replace obsolete equipment, increase efficiency, or meet pollution control requirements. Several firms said they will not expand production facilities until they get orders they are unable to fill with their current capacity.
Third District retailers generally reported small-to-moderate year-over-year increases in sales in October and early November. Gains appeared to be relatively greater for apparel than other product lines, according to area merchants. Store executives said discounting has been widespread to stimulate sales of fall and holiday merchandise, and the recent sales pace has mostly met expectations. “Consumers are definitely responding to low prices,” one contact said. Looking ahead, most of the retailers surveyed for this report said they expect sales to continue to move up through the end-of-year shopping period, but some noted that, due to discounting, they will have to sell more merchandise than last year to meet dollar-sales targets.
Third District auto dealers reported rising sales and improved profitability since the last Beige Book. Inventories were generally described as appropriate for the current sales rate. Dealers expect sales to rise until the end of the year, but some expressed concern that the sales pace might slip during the first quarter of 2011, after the better than expected results of 2010. Finance
Total outstanding loan volume at most of the Third District banks contacted for this report has been flat since the last Beige Book, with practically no change in any credit category. Bankers continued to report low demand for both consumer and business loans. Commercial bank officers generally indicated that credit quality measures have been roughly steady. However, one noted that “there is continued stress in the commercial real estate and construction portfolio.”
According to the Third District bankers surveyed for this report, the outlook is that there will be only slow growth in lending to both consumers and businesses in the months ahead. Although bankers in most parts of the District believe economic conditions are improving gradually, they do not expect a parallel rise in loan demand. And one banker expressed concern that economic recovery will come too slowly to reverse deteriorating financial conditions among some local firms.
Real Estate and Construction
In most parts of the Third District, residential real estate activity has slowed since the last Beige Book. Residential real estate agents generally indicated that sales of existing homes have been declining and that inventories have edged up. Most of the residential builders contacted for this report also said sales have been on a downward trend. Sales of higher-priced homes have been slower than sales of lower-priced homes in most areas. Home prices have been flat to down in most markets, although contacts noted that the rate of price decline has eased recently. Residential real estate contacts expect sales to remain slow until economic conditions improve. The widely shared view among agents is that “the real estate market will not come back until there are more jobs,” as one contact said.
Nonresidential real estate firms indicated that there has been little change in conditions in commercial and industrial markets since the last Beige Book. Contacts said that vacancy rates and rents have been nearly steady, although there have been increased reports of landlord concessions. Several contacts reported that tenants have been taking advantage of lower effective rents, resulting in increased leasing activity and relocations, but no increase in leased space. Some contacts noted recent signs of growing investor interest in apartment buildings and some Class A office buildings, but retail buildings continued to be out of favor. The pace of commercial construction remains slow, although there have been some recent increases in renovation and remodeling activity. Commercial real estate contacts expect current market conditions to persist. “Next year will be a lot like this year,” one contact said. Building owners and agents agree that a significant increase in demand for commercial and industrial space will not take hold until employment begins to grow more strongly.
Service-sector firms gave mixed reports, but on balance activity has been roughly steady since the previous Beige Book. Contacts said the health care and information technology sectors were showing some growth, but service-sector activity related to real estate, construction, and finance was flat to down. Also, some firms that provide services to governments indicated that their clients were making less use of their services as part of overall budget tightening. Looking ahead, most of the service firms contacted for this report expect only slow growth. One said, “We don’t expect much improvement next year.” Another said, “We will have to look to new markets for growth.”
Prices and Wages
Reports from manufacturers since the last Beige Book indicated some increases in raw material costs, but mostly steady output prices. Goods mentioned as rising in price were food products, metals, and electrical equipment. Retailers generally noted that most wholesale costs and retail prices have been steady, but some contacts reported that foreign suppliers, especially in Asia, have raised the prices of many products being ordered now for delivery next year.
Business firms in the region reported no major changes in wages since the last Beige Book. Employers generally reported that they were not having difficulty filling positions at current compensation levels. However, some said they were becoming somewhat concerned that sufficient numbers of qualified workers will be more difficult to obtain when they do decide to increase staffing levels.