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

July 18, 2012

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


Overall, business activity in the Third District has continued to improve since the previous Beige Book, although results were mixed. Manufacturing activity slowed somewhat. Retail sales and auto sales continued to increase, but at paces that varied across sectors and states. Third District banks have reported steady growth in lending and stronger credit quality since the last Beige Book. Demand for new home construction held steady, and brokers report improving sales of existing homes. Commercial real estate contacts report little change in current demand, while on average service-sector firms report modest continued growth. Price pressures have eased further in many sectors since the last Beige Book.

The overall outlook appears somewhat more optimistic relative to the views expressed in the last Beige Book, due in part to the slowdown experienced then and the subsequent positive announcements regarding major new projects. Manufacturers’ expectations for the next six months remain positive, while anticipated hiring and capital spending has increased further since the previous Beige Book. Retailers, auto dealers, and financial firms remain positive, but somewhat more cautious because of ongoing consumer uncertainty. Real estate and service-sector firms are slightly more optimistic but continue to plan for slow growth through the remainder of 2012. In general, business plans reflect caution, and business contacts express perspectives based on a “new normal” of steady growth at a slower pace than previous expansions.

Manufacturing. Since the last Beige Book, Third District manufacturers have reported declines in shipments and new orders. Gains - some seasonal - continued among the makers of industrial machinery. Makers of food products, lumber and wood products, primary metals, fabricated metals, electronic equipment, and instruments reported a falloff in demand. A few contacts mentioned a slowdown of Marcellus shale activity as a factor in weaker demand.

About eight out of 10 Third District manufacturers expect business conditions to improve or stay the same during the next six months - reflecting a similar level of optimism as reported in the last Beige Book. Optimism is represented in the major sectors cited above, except lumber and fabricated metals. Furthermore, makers of lumber products specifically cited seasonal declines for their weaker six-month expectation. Firms expressed greater expectations of future capital spending and future hiring since the last Beige Book. Several contacts mentioned the need for a new transportation authorization bill - subsequently passed by Congress after a three-year delay. That and recent announcements of deals to maintain and restart District refinery operations will likely add to the general optimism.

Retail. Third District retailers at major malls reported stronger year-over-year sales in May than in April, while outlet centers reported lower growth in May and June than in previous months. At malls, high-end goods, including Apple products and jewelry, did especially well. Sales of children’s clothing were down year-over-year at outlet centers for the first time since 2007; typically a negative signal, this time it may reflect a delay in deep discounting of back-to-school items that had already been discounted by this time last year. Retail contacts remain cautiously optimistic.

Auto sales moderated in Pennsylvania in June following strong sales in April and May, which followed an unusually strong first quarter throughout the Third District. New Jersey reported stronger auto sales in June after more modest growth in April and May. Industry contacts report that fluctuating gas prices are delaying some purchases by elevating uncertainty among buyers weighing their options between trucks and SUVs versus high-efficiency automobiles. Very low borrowing costs for inventories continue to support dealers’ profitability, while demand for dealer services and repairs remains low. The outlook for auto sales remains generally positive, although dealers are concerned that increased consumer uncertainty will not support further growth in sales through the third quarter.

Finance. Contacts from the Third District’s financial sector report continued slow improvement since the previous Beige Book. The very slow increase in demand is reflected in uneven reports, with some lenders reporting increases primarily as gains in market share, while others are shifting into and out of various lending segments. Bank contacts report frequent requests from business borrowers for loan modifications, while home refinancings have slowed recently. Most contacts report strong, improving credit quality as households and businesses pay down debt early and build cash reserves. Many contacts report that businesses have adjusted to the “new normal” and anticipate little new growth “through the election and after.”

Real Estate and Construction. Residential builders report little change in their level of activity since the last Beige Book. Traffic remained relatively strong, but contract signings remained elusive and weaker than in the first quarter. While uncertainty remains and recent sales were disappointing, high levels of interest continue to encourage builders on their prospects over the next few months. Contacts report a few new developments in select markets and limited hiring to facilitate strategic growth objectives. Residential brokers reported improving year-over-year home sales in May, and inventory has fallen significantly over the past two years in most markets. Bidding wars reported in a few markets for low-end homes signal that prices in those markets have likely found a bottom. The outlook among builders and brokers remains cautiously positive.

Nonresidential real estate activity has changed little since the last Beige Book, with most contacts indicating continued slow growth in demand for lease and new construction. Bidding for the design and construction of new projects remains “cut-throat,” and margins remain tight for most lease negotiations. Three significant groups of announcements - passage of the two-year federal transportation bill, the various District refinery deals, and a new funding agreement for construction of an urban development project in downtown Allentown - have raised expectations for stronger growth of nonresidential construction activity in the near future. The overall outlook for nonresidential real estate has brightened somewhat since the last Beige Book.

Services. Most Third District service-sector firms continue to report little change from the slow but positive growth reported in the last Beige Book. One contact captured the thoughts of many by describing the economy as “orderly, functioning, nothing exciting.” Staffing firms report some seasonal uptick in hiring, but little change in overall demand or expectations. A few firms report opportunistic investments to capture market share, enter new markets, or take advantage of growth in emerging economies, such as Brazil. Election-year advertising has been a boon for some firms. However, election-year uncertainty and the slowdown in Europe and China have sidelined investment plans for many firms for the remainder of the year. Overall, service-sector firms retain a positive, but cautious, outlook for growth.

Prices and Wages. Price levels have eased further since the previous Beige Book and remain generally constrained. Falling gas prices have contributed to the recent broader price easing. Manufacturing firms have reported lower cost factors since the last Beige Book. Home builders continue to report rising cost pressures for materials and limited ability to pass these costs along. Retailers also continue to report tight margins. Nearly all contacts report an ongoing lack of wage pressures, other than for medical benefits. House prices have stabilized in many areas for low-end homes but continue to fall for high-end homes.

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