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

THIRD DISTRICT — PHILADELPHIA

Economic activity moved up somewhat in the Third District since the
last Beige Book, on balance, although the advance did not include all
sectors. Manufacturers, on balance, reported increases in shipments and
new orders. Retailers generally posted gains from February to March.
Motor vehicle dealers indicated that sales increased. Third District
banks reported steady to slightly decreased loan volume outstanding.
Residential real estate agents and homebuilders said home sales
increased from February to March. Nonresidential real estate leasing and
construction activity continued to be weak, but contacts reported some
increase in purchase and investment activity. Business firms in the
region indicated that prices of most goods and services have been
steady, although there were increased reports of rising prices for basic
materials and construction-related products.

The outlook among Third District business contacts is that business
activity will continue to move up slowly in most sectors in the months
ahead. Manufacturers forecast a rise in shipments and orders during the
next six months, on balance. Retailers expect sales to expand modestly
as consumer confidence is slowly restored. Auto dealers expect the sales
rate to remain above last year’s pace. Bankers expect slight increases
in lending. Residential real estate contacts expect home sales to rise
somewhat during the balance of the year, but they are unsure of the
immediate trend after the expiration of the federal tax credit for
homebuyers. Contacts in nonresidential real estate expect leasing to
advance slightly as tenants take advantage of concessions and lower
rents, but they do not expect much growth in demand for commercial space
until firms begin to add workers in substantial numbers.

Manufacturing

Third District manufacturers reported increases in shipments and
new orders in March, on balance, although the number of firms recording
gains was not as large as it was in February. However, most of the major
manufacturing industries in the region posted net increases. In general,
manufacturers indicated that demand for their products was picking up
slowly. One said, “Business is better than a year ago, but not
exciting,” and another said, “There is a slow, steady gain.”

Third District manufacturers who were queried in March expect
business conditions to improve during the next six months, on balance,
and the level of optimism has been practically unchanged from last
month. Among the firms surveyed in March, about half expect increases in
new orders and shipments; about one-tenth expect decreases. Capital
spending plans among area manufacturers remain positive, on balance, but
have weakened since the last Beige Book. About one-fifth of the firms
polled in March plan to increase expenditures for new plant and
equipment, although two-thirds plan to maintain level spending.

Retail

Third District retailers reported slight gains in sales in March
compared with February and with March of last year. They generally
indicated that spring apparel sales were moving up in line with
expectations. Some retailers also noted that sales of housewares and
home furnishings had risen recently, and one store executive said this
increase “shows consumers are more willing to spend, although they are
still being cautious.” Looking ahead, Third District retailers expect
modest year-over-year increases in sales for the spring season, although
they point out that the gain will be from a low sales level a year ago.

Third District auto dealers reported an improved pace of sales in
March compared with February. They said inventories remained well under
control. Dealers expect sales to continue to move up through the spring,
and they also anticipate that some domestic franchises that had been
discontinued will be restored in the months ahead. In general, dealers
are maintaining their expectations that total sales for this year will
be slightly ahead of last year.

Finance

Total outstanding loan volume at most of the Third District banks
contacted for this report has been level or has declined slightly since
the last Beige Book. On balance, commercial bank lending officers said
there has been a small increase in consumer lending, although some
bankers noted an increase in paydowns and payoffs. Bankers generally
reported declines in most other credit categories. Most of the surveyed
banks indicated that credit quality measures showed little change since
the last Beige Book.

Looking ahead, Third District bankers expect some growth in
lending. They expect gains in consumer lending and lending to
businesses. Several bankers indicated they plan to step up business
lending, but only to borrowers “with a sound income stream,” as one
contact said. Some bankers also said they expected commercial real
estate lending and lending for construction to begin to rise. Bankers
noted that commercial real estate funding by both banks and nonbank
financial institutions was starting to become more available.

Real Estate and Construction

Sales of new and existing homes picked up somewhat in March after
falling in February. Sales continued to be stronger in the lower- and
moderate-price segments of the market for both new and existing homes.
Real estate agents said the inventory of homes listed for sale remained
elevated, and sales prices have been steady or declining across the
region. Local real estate agents and homebuilders said it was difficult
to determine whether the recent increase in sales was the result of
buyers signing contracts to take advantage of the federal tax credit
before its April expiration or whether the upturn reflected a more
fundamental seasonal increase. However, the general view among Third
District real estate contacts is that any improvement in home sales
during the rest of the year will be modest. As one contact commented,
“We have hit the bottom, but now people are only going to buy if they
need to.”

Nonresidential real estate firms indicated that leasing and
construction activity remained slow. Contacts reported that vacancy
rates have been about steady for most types of commercial property since
the last Beige Book, although vacancy rates for some retail centers have
risen. Effective rents continued to be under downward pressure as
landlords make concessions to keep existing tenants and attract new
ones. Contacts expect nonresidential real estate markets to remain weak
as long as tenants are unwilling to expand. One contact said, “The
office market will suffer until employment returns to more normal
levels.” However, some contacts said they believe investor interest in
purchasing or financing commercial property was beginning to increase
because expected returns to real estate investment appeared to be rising
relative to other investment classes. Additionally, some contacts noted
that the decline in property values in the past year has prompted some
tenants to purchase the buildings they occupy.

Prices

Reports on input costs and output prices have been mixed since the
last Beige Book. Around one-third of the manufacturing firms polled in
March noted increases in the costs of the commodities they use, and
around two-thirds reported steady input costs. Most continued to report
that they have not raised the prices of the products they make, although
some producers of food products and metals have raised prices.
Construction firms noted recent increases in the costs of lumber,
drywall, metal products, oil-based products, and some glass products.
Retailers reported mostly flat selling prices.

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

[TOPICS: M$$CR$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]