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

THIRD DISTRICT – PHILADELPHIA

Business activity in the Third District has remained mixed, with
more positive sectors than negative ones compared with the previous
Beige Book. In late August and early September, Hurricane Irene and
Tropical Storm Lee left dozens of people injured or dead, damaged or
destroyed thousands of homes, and cost hundreds of millions of dollars
in disruption and damage throughout much of the Third District. Since
the last Beige Book, manufacturing activity has declined further, but at
a slower rate. Retailers reported flat to slightly down year-over-year
sales. Motor vehicle dealers provided a bright spot with stronger
year-over-year sales. Third District banks have reported little overall
change in loan volume outstanding since the last Beige Book. On balance,
residential real estate and construction activity have been slightly
stronger since the last Beige Book, which was released soon after the
debt-ceiling turmoil. Commercial real estate contacts have continued to
report steady to slightly improved market conditions in most parts of
the Third District. Service-sector firms reported generally flat to
modest growth. Price pressures have moderated for many sectors but
continue to strain profit margins. Most Third District business contacts
had already lowered their expectations over the past few months –
projecting slow to flat growth through year-end. Ongoing uncertainty
since the previous Beige Book has not significantly altered their
outlook. Manufacturers still expect a modest rise in shipments and
orders during the next six months. Retailers are hopeful for stronger
sales, and auto dealers are uncertain; both have lean inventory plans.
Most banking and residential real estate contacts had lowered their
expectations before the last Beige Book. Commercial real estate contacts
and service-sector firms continue to plan for slow growth; however,
uncertainty has increased.

Manufacturing

Since the last Beige Book, Third District manufacturers reported
further decreases in new orders and shipments; however, the rate of
slowdown has lessened and is less widespread. The makers of primary
metals, fabricated metals, and electronic equipment reported declining
product demand. However, growing product demand was reported by makers
of food products, lumber and wood products, industrial machinery, and
instruments, and by printers and publishers. Hurricane Irene and
Tropical Storm Lee were mentioned positively (as a source of increased
demand for cleanup, repairs, and emergency equipment) and negatively
(for flooding, harvesting problems, and shipment delays) by almost equal
numbers of firms.

However, most firms were unaffected. Two key firms that supply or
service manufacturers and other broad sectors have reported steady
modest growth since the last Beige Book. Both anticipate stable growth
from most of their clients (except defense-related firms) for the
remainder of the year.

Third District manufacturers expect business conditions to improve
during the next six months, despite expressing significant uncertainty.
Since the last Beige Book, the general outlook has improved
substantially, with nearly one-third more firms expecting an improvement
and one-third fewer firms expecting a decline. Capital spending plans
among area manufacturers remain slightly positive; however, significant
uncertainty has been expressed. Retail. For most of August and
September, Third District retailers reported that sales were flat to
down compared with a year earlier. However, “October started off with a
bang,” said one department store chain manager. Low consumer confidence
and rising uncertainty were widely cited as reasons for maintaining low
inventory levels as the holiday season approached. Missed profit
opportunities may result if the holiday sales prove stronger than last
year, but a flat to down season could force further retail store
closings.

Auto sales picked up in August and September, according to Third
District auto dealers. Sales growth meant market share losses for Honda
and Toyota, which have resumed full production, but whose dealer
inventory may not be fully replenished until early 2012. Inventories
remain lean and used cars remain scarce, leading to strong prices for
dealers. Limited rehiring may ensue, if sales growth continues.

Finance

At most of the Third District banks contacted for this report,
total outstanding loan volume has been roughly level since the previous
Beige Book. Overall, commercial and industrial loans and commercial real
estate loans have contracted somewhat. Bankers anticipate continued low
consumer loan demand due to high unemployment rates and ongoing
deleveraging, which has accelerated with the recent surge in
refinancings. Credit quality, along with growing corporate and household
cash balances, is improving. The outlook among Third District bankers
interviewed in September is that total loan volume will expand only
slightly over the remainder of the year.

Real Estate and Construction

Residential real estate activity in the Third District has been
mixed with sales rising, then falling since the previous Beige Book, and
with builders reporting slight gains in activity. August sales figures
finished up over the year, but agents reported that September would be
off last year’s pace. Properties are moving, but inventory remains very
high. Overall, 2011 sales are expected to be lower than 2010 in all
three Third District states. While trends and timing varied across
states, builders reported somewhat stronger activity overall, since some
distance has passed since the debt-ceiling debate. Still, sales remain
difficult, and buyers noncommittal, as economic uncertainty increases.
“People are really scared,” said one builder. Labor and material costs
have flattened, but list pricing has, as well; therefore, builders are
struggling to hold margins. The industry remains cautious. Caution
guides the commercial and industrial real estate sector as well, but the
sector is less susceptible to the news cycle. Since the last Beige Book,
continued slow growth has been observed, with select markets beginning
to tighten. In those markets, vacancy rates tend to drop, rents rise,
and concessions disappear. Investor interest has picked up, but deals
remain difficult to close. New construction or renovation plans are
mostly limited to institutional, life sciences, multifamily, and
warehousing sectors in selected markets.

Services

Third District service-sector firms have reported flat to modest
growth since the last Beige Book. A logistics firm reported
above-average improvement, noting some growth was seasonal. A staffing
firm noted that its flat activity was marked by relatively greater
interest in workers with high skills or low skills and little or no
interest in workers with medium skills. The debt-ceiling agreement has
increased caution for defense-related firms and may be a cause of future
layoffs. These firms as well as several other large service firms
reported greater efforts to expand their overseas markets, where their
growth rates have been stronger. Firms remain generally positive, but
very cautious, reporting that their own customers often delay decisions.
Prices and Wages. Since the previous Beige Book, general price levels
remain contained. Price pressures have flattened or lessened further for
retailers, service-sector firms, and builders for most factor prices;
however, margins remain very tight. Retailers did note increases for
cotton products. Manufacturers have been reporting slightly greater
price pressures and modestly greater success at passing along those
costs. Rents are rising in a few select markets, but house prices remain
soft or are falling, and wages pressures are low. However, reports of
shortages of skilled labor may reflect unrealistically low wage offers.

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

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