WASHINGTON (MNI) – The following is the latest Beige Book survey of
economic conditions in the Federal Reserve’s Third District,
published Wednesday:

THIRD DISTRICT – PHILADELPHIA

Since the last Beige Book, Third District economic activity has
continued to grow at a very slow rate. Overall, manufacturing growth has
leveled off at a low rate since the last Beige Book. Retailers posted
strong year-over-year sales increases in June. For motor vehicle
dealers, the slowdown in sales that began in May eased slightly further
in June. On balance, bank lending has been mostly flat since the last
Beige Book. Steady and falling house prices continue to dampen sales of
existing and new homes, according to residential real estate and
construction contacts. Commercial real estate contacts reported small
improvements in market conditions since the previous Beige Book. Slight
increases in activity were reported by service-sector firms, dampened
somewhat by a hiring slump among customers. Price pressures from food,
energy, and other commodities continue to affect many sectors. The
ability to pass along costs remains mixed, and there is little evidence
of wage pressure.

Third District business contacts continue to expect slow growth
despite expressing increased uncertainty. Manufacturers forecast a
modest rise in shipments and orders during the next six months.
Retailers remain cautiously optimistic about future sales; auto dealers
are more agnostic. Bankers expect slight growth in lending, at best.
Residential real estate contacts are generally planning for a
continuation of slow growth, comparable to last year. Contacts in
commercial real estate continue to expect modest gains. Service-sector
companies also expect continued slow growth.

Manufacturing

Since the last Beige Book, Third District manufacturers reported a
lull in the growth of new orders and a slowdown in the modest growth
rate of shipments. However, activity was reported to be a bit stronger
in July. Among key manufacturing sectors in the Third District, the
number reporting increases of both shipments and orders has narrowed
since the last Beige Book. Growing product demand was reported by makers
of furniture; instruments; stone, clay, and glass products; and printers
and publishers. However, makers of food, apparel, chemicals, rubber,
primary metals, fabricated metals, and electronics reported declining
product demand. Comments from firms were mixed, with several citing an
ongoing lull in customer demand, a few surprised by unseasonal
increases, and many concerned by economic uncertainties.

Despite the uncertainties, Third District manufacturers have grown
somewhat more positive in their outlook for business conditions over the
next six months compared to the time of the previous Beige Book. Among
firms contacted, over two-fifths expect increases in new orders and
shipments, while about one-fifth expect decreases. One-third of firms
polled project increases in capital spending over a six-month planning
horizon — the same proportion as at the last Beige Book.

Retail

Third District retailers reported stronger sales in June than a
year earlier. Shopping trips and a willingness to spend were aided by
falling gas prices since the previous Beige Book. Consumers continue to
search for value, and retailers continue to respond with merchandise at
lower price points. Retailers remain cautiously optimistic as the
critical September through December retail period approaches. However,
given the slow growth so far this year, one retailer indicated that it
would likely implement only half of this years capital budget plan.

Third District auto dealers generally reported that sales eased
further in June after Mays slowdown. Results varied by brand, depending
on reliance on Japanese production for the vehicle or parts. One dealer
of General Motors brands indicated June was the dealerships best month
of the year. Dealers remain uncertain about future sales.

Finance

Third District banks contacted in July indicated little change in
loan volumes outstanding. Many sources reported continued weak demand
from small businesses; some bankers cited stronger lending to middle
market businesses. Revolving credit had bounced back somewhat in June,
after a fall-off in April and May; however, the gains may have been lost
in early July. On balance, total credit extended by banks in the region
has been flat to slightly down. Expectations for better growth were not
met for the most recent period — dampening expectations for anything
but the slightest improvement in the near future, according to banking
contacts. Real Estate and Construction. Residential real estate activity
in the Third District has changed little since the previous Beige Book.
While some agents reported positive comparisons during June and early
July for showings and sales compared to year-ago levels, activity last
year was soft after the tax credit expired. Agents and builders continue
to report stronger sales among mid- and low-priced homes, but incidences
of high-priced home sales are increasing. Reports of multiple offers for
condos in center city Philadelphia were noted by one agent as a glimmer
of improvement. Most market participants do not expect the year as a
whole to be markedly different from last year. In most parts of the
Third District, sale prices of existing homes continue to fall slightly;
in a few areas, prices were unchanged. Traffic and sales of new homes
have weakened since the last Beige Book; however, one builder reported
an uptick in activity in Pennsylvania in the last two weeks.

Commercial and industrial real estate contacts have noted small
improvements in the Third District since the previous Beige Book.
Overall, vacancy rates have improved for office space, industrial space,
and apartments, although one manager said activity seems to have come to
a standstill in the last month. Retail space vacancies may have edged up
slightly; however, demand is stronger in regional centers and weaker at
neighborhood sites. An ongoing trend of trading up for quality as office
space leases renew has lowered vacancies and reduced concessions for
Class A space, while raising vacancies for Class B space. Rents are
generally steady for most sectors in most areas and concessions remain
common.

Services

Reports from Third District service-sector firms were slightly
positive overall, but firms described various challenges. A recurring
theme was a recent slowdown in hiring, especially from small and
medium-sized businesses. One staffing agency described “almost a stop to
new [excludes replacement] hiring orders in the last three weeks.” Other
firms cited projects delayed due to ongoing economic uncertainties,
including government-related projects contingent on budget negotiations.
The most positive firms recognized that the “easy year-overyear comps
are over” in this recovery and that continued growth will be slow.
Despite these challenges, most service-sector firms expect growth to be
somewhat better over the next six months. Prices and Wages. Since the
previous Beige Book, the percent of manufacturers reporting increases in
prices paid for inputs dropped from more than one-half to one-third.
Over the same period, the percent reporting decreases in prices received
for their own products rose from nearly zero to over one-sixth. Rising
commodity prices continue to pressure retailers, service-sector firms,
and home builders to pass through costs when they can and to lower the
price-point of their offerings. There are a few reports of a little
upward pressure on rents in selected local markets for apartments and
some retail space. Meanwhile, there is little evidence of pressure on
wages.

** Market News International Washington Bureau: 202-371-2121 **

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