WASHINGTON (MNI) – The following is the text of the Federal
Reserve’s Third District assessment in Wednesday’s Beige Book survey of
regional economic conditions, prepared by the St. Louis Fed through Feb.
17:
THIRD DISTRICT – PHILADELPHIA
Overall, business activity in the Third District has grown at a
somewhat faster pace compared with the previous Beige Book. The overall
sentiment has been more positive, although the very mild winter weather
may have played a part. Since the last Beige Book, manufacturing
activity has grown further with more broad sectors contributing to the
gain. Retail sales maintained steady year-over-year increases. Motor
vehicle dealers experienced unseasonably strong sales growth overall;
however, results varied by state. Third District banks have reported
slight growth in lending and continued improvement of credit quality
since the last Beige Book. New home construction started the year strong
with the warm weather assist. Commercial real estate contacts continued
to report steadily improving markets for industrial, retail, and office
space. Overall, service-sector firms reported continued growth. Price
pressures have remained contained for most sectors, with little change
from the last Beige Book. Most firms have expressed a brighter outlook
since the last Beige Book.
Manufacturers anticipate rising shipments and orders during the
next six months. Retailers expect slightly stronger sales, and auto
dealers are increasingly confident that the current surge in sales will
carry into the spring selling season. Banking, real estate, and
service-sector firms continue to plan for slow growth in 2012. In
general, contacts seemed to prefer talking about recent positive trends
rather than reiterating their uncertainty. However, their concerns
continue to include the ongoing slow housing recovery, Europe’s economic
problems, and federal budget indecisions. Manufacturing. Since the last
Beige Book, Third District manufacturers have reported further increases
in new orders and shipments. Gains were widespread among the makers of
food products, lumber and wood products, primary metals, instruments,
and electronic equipment. A supplier to the broad industrial market
stated that demand accelerated over the past several months and that the
production capacity of many manufacturing clients was picking up.
Contacts also reported that work was returning from overseas and that
foundries were reaching capacity. The primary metals sector reported
strong demand from the automotive and heavy equipment sectors. Among the
makers of instruments and of electrical machinery, some contacts
indicated that the level of demand seen recently has been the highest
since near the beginning of the recession. Even the housing sector
contributed to slight upticks in demand, according to contacts from two
firms that produce housing-related products.
About nine out of 10 Third District manufacturers expect business
conditions to improve or stay the same during the next six months; most
expect their business to increase. This optimism permeates nearly every
broad manufacturing sector. Increasingly, our contacts cite signs of
stronger economic growth, although some of the expected increase
reflects seasonal trends. Risks from Europe’s problems and constraints
from a weak housing market continued to add uncertainty to the outlook,
according to some contacts. Expectations of capital spending and future
hiring have strengthened since the last Beige Book.
Retail
Third District retailers reported little drop-off from the holiday
shopping season – maintaining steady year-over-year sales increases. One
industry contact reported better than normal sales for January; another
reported perceptible, gradual improvement. All contacts conceded that
the mild winter weather may have increased activity, although sales of
winter clothes and gear have suffered. Price competition remains tough
and shoppers are still very budget conscious, according to some
contacts. Overall, retail contacts were a bit more optimistic but remain
cautious.
Auto sales strengthened further in January and February, especially
for Pennsylvania dealers. New Jersey dealers had a stronger December,
which may have pulled sales forward from January; this was in part due
to financial-sector workers spending their year-end bonuses. The outlook
for auto sales remains very strong. Industry contacts indicated that
some larger dealers have begun hiring, mostly in sales. More hiring is
expected if robust sales continue into the spring season.
Finance
Overall, loan volumes were flat to up slightly in the Third
District since the previous Beige Book. The issuance of home equity
lines and home mortgages, including refinancing, increased the most,
although some contacts were unwilling to write 30-year mortgages at the
current low rates. Commercial real estate and C&I lending remained flat.
Banking contacts reported low demand for some lines and early paydowns
in others. Overall, credit quality continued to improve. One financial
contact reported that the pace of loans going into delinquency has
slowed, although the rate being resolved by foreclosure or workout
remained flat.
Real Estate and Construction
Residential builders reported strong activity and sales in January
and early February. One Pennsylvania builder said it was the strongest
January in several years. A New Jersey builder closed deals that had
been initiated in November and then dragged through December; the
builder also reports a good backlog of sales. The mild winter weather
helped with production and may have boosted traffic. Contacts cited a
more active resale market as a positive trend but expressed concern over
higher gas prices and increased compliance costs in the mortgage market.
A residential broker also reported a stronger January than last year.
Builders reported hiring some sales staff. The outlook among builders
and brokers is modestly more positive. However, a broker cautioned that
increased sales activity will first spur the shadow inventory to emerge
and add to the active inventory, before the active inventory can begin
to shrink.
Brokers and managers of nonresidential real estate have reported
generally improving conditions for industrial, retail, and office space
since the last Beige Book. The industrial market remains strong, and
gains are spreading to the weaker South Jersey market area. High-end and
low-end retail markets are especially strong. Mid-value retail,
including grocery stores, which often locate in community shopping
centers and street retail properties, is struggling, producing higher
vacancies. Office market contacts reported that signs of pent-up demand
are emerging that will lead to positive net absorption by year’s end.
The overall outlook for nonresidential real estate has improved since
the last Beige Book, but growth will remain modest.
Services
Third District service-sector firms generally have reported further
growth since the last Beige Book. A logistics firm reported very strong
year-over-year results through the first six weeks of 2012. Despite some
expressed concerns, the contact is hopeful that this strong pace is
maintained or improves when “freight season” begins in March. Though
somewhat skeptical of the sudden surge in confidence and market
enthusiasm, one contact quipped, “I won’t fight the tide!” Advertising
dollars are expected to build through the year with the Olympics and the
presidential election. One staffing firm reported a surprising dip in
new orders compared with last year and a shift to short-term orders that
are not indicative of growth. The majority of service-sector firms
anticipate growth will steadily improve in 2012.
Prices and Wages
Price levels have remained contained since the previous Beige Book.
Auto dealers and freight shippers still command favorable pricing power.
Price pressures are mixed among manufacturing firms, with some firms
unable to pass their higher costs along. Retailers and homebuilders
continue to report tight margins. Wages are reported to be flat, and
some firms have substituted lower cost temporary contract workers to
reduce their overall wage bill. House prices are expected to fall
further; however, nonresidential rents are stabilizing and concessions
are scarcer.
** Market News International Washington Bureau: 202-371-2121 **
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