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

Overall business activity in the Third District has continued to
grow modestly since the previous Beige Book, with various sectors
experiencing typical seasonal patterns positive and negative. Since
the last Beige Book, manufacturing activity has continued to grow
modestly with some signs of a seasonal slowdown. Retail sales overall
generally increased for the holiday season, meeting seasonal
expectations. Motor vehicle dealers experienced further strong sales
growth and strong pricing power, overcoming some of the typical seasonal
drag. Third District banks have reported slight growth in loan volume
outstanding since the last Beige Book. New home construction slowed
further, driven by seasonal trends and falling prices for existing
homes. Commercial real estate contacts continued to report slow growth
year-over-year, although anticipated seasonal slowing has been a factor
since the last Beige Book. Service-sector firms reported generally
modest growth. Price pressures remained contained for most sectors, with
little change from the last Beige Book.

The general outlook seems to have improved for most firms 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 pent-up demand will
carry well into the spring selling season. Banking, real estate, and
service-sector firms continue to plan for slow growth in 2012. Many have
voiced concerns over the ongoing lack of a housing recovery, the threat
from Europe’s economic woes, and the indecision on numerous federal
budget issues.

Manufacturing.

Since the last Beige Book, Third District manufacturers have
reported further modest increases in new orders and shipments. Gains
were widespread among the makers of industrial machinery and equipment,
and of food products. Similarly, a supplier to the broad industrial
market confirmed continued growth but noted some softness of a seasonal
nature. Some makers of lumber and wood products and of electrical
machinery reported seasonal slowing. However, one electrical equipment
firm logged the worst month of orders in five years. Several contacts
attributed additional slowing to end-of-year inventory adjustments.
Contacts in primary metals reported mixed results dependent upon their
firm’s market orientation, for example, to Europe or to the domestic
auto industry.

Most Third District manufacturers remain split between expecting
business conditions to improve during the next six months and expecting
conditions to stay the same. This overall positive tendency has pervaded
more sectors since the last Beige Book. However, the currently low
seasonal demand, cited by many firms, may be a large factor in the
anticipation of near-term gains. Manufacturing contacts continued to
cite weak housing markets as a drag, Europe’s woes as a threat, and
rising auto demand as a positive factor. Expectations of capital
spending and future hiring also remain positive but have moderated since
the last Beige Book.

Retail.

Third District retailers reported strong holiday sales in November
and positive, but softer, sales in December. An outlet operator
recounted that the typical budget-conscious, discount-driven consumer
shopped early, then faded somewhat. The longer shopping season and added
store hours produced greater overall sales volumes but also increased
the wage bill for hourly workers. Profits for the season were maintained
by closely watching inventories and markdown levels. Unseasonably warm
weather dampened sales of cold-weather goods, but rain boots sold
well. Prospects beyond this holiday season are expected to follow
recent trends with high-end, online, and outlet market segments
attracting the most consumer spending.

Auto sales remained unseasonably strong through November and
December, according to a Third District industry contact. With still a
little more demand than supply, dealers continue to offer less
discounting and earn better grosses. Also, pent-up demand remains
strong. An industry contact indicated that dealers may begin hiring if
robust sales continue into the spring season. Finance. Overall loan
volumes continued to expand slightly in the Third District since the
previous Beige Book; however, many bankers reported difficulty
maintaining loan volumes. Some reported turning down deposits for lack
of sufficient lending opportunities. The strongest loan growth continued
to emerge in home mortgages, including refinancings. Commercial real
estate and C&I lending were flat. Credit quality continued to improve
somewhat. Third District bankers expressed several concerns, including
Europe’s economic problems, a lack of recovery in the housing market,
uncertainty and a lack of confidence with Washington, and uncertainty
over the renewal of federal contracts.

Real Estate and Construction.

Residential builders are glad to have 2011 behind them. Builders
reported that the year closed with sales activity slowing somewhat more
than seasonal trends would predict due to lack of confidence, as
existing home prices continued to fall in most markets. Some of the
activity reported in the last Beige Book dissipated, as builders were
unable to close on contracts. New construction activity continues to
shift from the single-family market toward the multifamily market. Some
builders are planning for growth in 2012, even some hiring. However,
their plans assume an increase in market share and an expectation that
some competitors will not endure a seventh consecutive year with little
or no growth.

During a seasonally slow period for most nonresidential real estate
activity, contacts have reported no significant changes since the last
Beige Book. The seasonal lull should generate a little pickup in leasing
in early 2012. The sudden announcement in early December of an immediate
refinery closing, not anticipated until early 2012, sent hundreds of
workers home, including construction workers with jobs associated with
facility maintenance and repair. A few weeks later another refinery,
currently in the process of restarting, announced expansion plans. New
construction and renovation plans remain mostly limited to
institutional, life sciences, multifamily, and warehousing sectors in
select markets. A portion of the new construction, especially for
warehousing, represents market shifts among regions, rather than net
overall market growth. The overall outlook for demand of nonresidential
space is for continued slow growth.

Services.

Third District service-sector firms have continued to report modest
growth since the last Beige Book. A staffing firm noted that firms
appear busier, based upon an end-ofyear uptick in short-term contracts
to provide coverage for vacations and extra holiday business a pattern
not observed since the recession began. The overall trend toward
temporary or contract basis for new placements, rather than permanent,
full-time hires, remains unchanged. Contacts indicated that financial
services will face challenges in 2012, and many sources expressed
concern for defense-related activity in the wake of recent and ongoing
federal budget indecisions. The majority of service-sector firms
anticipate slowly improving growth rates through 2012.

Prices and Wages.

On balance, price levels have changed little since the previous
Beige Book. Auto dealers and freight shippers still command favorable
pricing power. Several manufacturing firms recently raised prices and
have yet to observe any pushback from their customers. Retailers and
homebuilders continue to report very tight margins. Builders are worried
about ongoing closures along their supply chain as the recession in
construction continues. Substantial cost increases are anticipated when
a recovery emerges and triggers demand for more building materials.
Although exceptions exist within specific submarkets, concessions are
still expected of many bankers, builders, and leasing agents. Most firms
reported no significant upward wage pressure. While most firms are
anticipating greater increases in health benefit costs, a few have
indicated a significant rollback from last year’s large rate hike.

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

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