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U.S. Federal Reserve Beige Book: Philadelphia District (Text)

The following is the text of the Federal Reserve Board’s Third District-- Philadelphia.


Overall, business activity in the Third District has continued to show slow, steady improvement since the previous Beige Book. Overall sentiment improved, and the unseasonably mild weather undoubtedly contributed to this. Since the last Beige Book, manufacturing activity has grown further, and many manufacturing industries have contributed to this growth; however, the pace has slowed slightly. Retail sales continued to grow modestly. Motor vehicle dealers experienced unseasonably strong sales growth in February, but sales were less robust in March. Third District banks have reported slight growth in demand and continued strong credit quality since the last Beige Book. New home construction continued to improve in Pennsylvania but slowed in New Jersey due to the large inventory of distressed homes. Little change was seen by commercial real estate contacts who reported slowly improving markets. Overall, service-sector firms reported continued growth. Price pressures have remained contained for most sectors, with little change from the last Beige Book.

The outlook remains relatively optimistic among most firms, similar to the sentiment expressed in the last Beige Book. Manufacturers’ expectations for the next six months have changed little and remain relatively high. Retailers continue to expect slow, steady improvement. Auto dealers anticipate continued strong sales; however, they acknowledge that the robust first quarter might shave a little off the typical spring seasonal surge. Banking, real estate, and service-sector firms continue to plan for slow growth in 2012. In general, business plans remained cautious; however, there was a noticeable lack of the litany of risks and uncertainties as expressed by contacts over the last six months.


Since the last Beige Book, Third District manufacturers have reported continued growth of new orders and shipments, although the pace has slowed slightly. Gains were widespread among the makers of food products, lumber and wood products, fabricated metals, industrial machinery, and instruments. New apartment construction, rising auto sales, and Marcellus shale activity are driving increased demand, according to various contacts. A lumber firm expects growth but mostly from market share gains. Manufacturers of food products and of chemicals expressed concerns about the impact of rising fuel prices on their input and output prices.

About nine out of 10 Third District manufacturers expect business conditions to improve or stay the same during the next six months; firms are evenly divided. Seasonal trends may be responsible for some of the anticipated improvement, but the optimism is nearly uniform across all major sectors. The usual litany of risks and uncertainties to the outlook - typical over the past six months - was virtually absent from current comments by manufacturers. However, caution remains; expectations of capital spending and future hiring have changed little since the last Beige Book.


Third District retailers reported modest growth rates overall but expressed greater certainty that mild weather had played a significant role in year-over-year comparisons. According to one contact, outlet malls fared better than broad retail but they should have experienced stronger sales. Gas prices pinched. While mild weather attracted more people, the average purchase per store dropped from year-ago levels. Overall, retail contacts see the economy firming but remain very cautious.

Auto sales were robust in February for dealers in New Jersey and Pennsylvania. For the first two months of the year, year-over-year sales growth in New Jersey was reported to be higher than national growth despite a soft January report. Pennsylvania contacts indicated that March sales were strong but not as robust as in February. The outlook for auto sales remains strong. However, contacts indicate that the rapid first quarter pace may somewhat dampen the spring sales season, which typically peaks in May or June. Modest hiring continues at select dealers, but caution remains the trend.


Overall, loan demand has continued to grow slightly in the Third District since the previous Beige Book; however, activity has been uneven. Mirroring trends noted by other sectors, community banks note that the strongest loan demand has been for inventories and capital equipment to manufacturers and for investments in higher education, health care, technology sectors, and multifamily housing. One large bank contact noted strong demand from middle-market private equity firms, while the pace of refinancing had diminished. Most contacts reported solid credit quality.

Real Estate and Construction

Since the last Beige Book, residential builders have reported mixed results for sales - and hence for their construction activity - depending on the extent of distressed sales activity in their region. Builders reported slower sales in southern New Jersey - where foreclosure rates are the highest - but continued apace in Pennsylvania. A Pennsylvania builder was more encouraged than at any time in the past five years; the company is doing more hiring for sales and for construction workers. One contact observed the resumption of heavy flows of specialized construction trade workers on the roads between Philadelphia area worksites and their Lancaster area homes; this level of activity has been absent for five years. Residential brokers reported strong, weather-aided year-over-year sales growth. The outlook among builders and brokers remains somewhat more positive.

Nonresidential real estate activity has continued to slowly improve since the last Beige Book, with few changes. The industrial real estate market remains the strongest, followed by higher education, multifamily residential investment, and activities related to Marcellus shale. Philadelphia’s Center City office market is characterized by a continuing trend toward consolidations and a growing trend toward conversions to apartments. The overall outlook for nonresidential real estate remains positive but modest.


Most Third District service-sector firms have reported further growth since the last Beige Book. Firms’ strongest demand emanated from higher education and health-care institutions. Hospital systems reported rising admissions. Staffing firms reported mixed results, with strong orders from the manufacturing, health-care, and technology sectors. Demand for general administration and for clerical workers has been softer; however, clients were beginning to talk of hiring plans. Service-sector firms anticipate that growth will steadily improve in 2012.

Prices and Wages

Price levels have changed little since the previous Beige Book - remaining generally constrained. Some deals and promotions are beginning to sap strong auto dealer pricing power. This was anticipated as Japanese automakers resumed normal production levels. New federal regulations, including medical certification requirements for commercial drivers, have exacerbated truck driver shortages. Favorable pricing power for freight shippers will push costs along to their customers and end-users. As a recent study predicts, these high costs could rise even further if the need arises to truck fuel to nearby markets that are currently being served by pipeline from refineries that are being closed. Price pressures have eased somewhat for manufacturing firms since the last Beige Book. Retailers and homebuilders continued to report tight margins with high, not rising, nonlabor factor costs. House prices have fallen further; however, nonresidential rents are stabilizing in some sectors. Contacts continued to report a lack of wage pressures, other than for medical benefits.

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