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:

THIRD DISTRICT – PHILADELPHIA

Overall, business activity in the Third District has continued to
show slow, steady improvement since the previous Beige Book. Overall
sentiment improved, and the unseasonably mild weather undoubtedly
contributed to this. Since the last Beige Book, manufacturing activity
has grown further, and many manufacturing industries have contributed to
this growth; however, the pace has slowed slightly. Retail sales
continued to grow modestly. Motor vehicle dealers experienced
unseasonably strong sales growth in February, but sales were less robust
in March. Third District banks have reported slight growth in demand and
continued strong credit quality since the last Beige Book. New home
construction continued to improve in Pennsylvania but slowed in New
Jersey due to the large inventory of distressed homes. Little change was
seen by commercial real estate contacts who reported slowly improving
markets. Overall, service-sector firms reported continued growth. Price
pressures have remained contained for most sectors, with little change
from the last Beige Book.

The outlook remains relatively optimistic among most firms, similar
to the sentiment expressed in the last Beige Book. Manufacturers’
expectations for the next six months have changed little and remain
relatively high. Retailers continue to expect slow, steady improvement.
Auto dealers anticipate continued strong sales; however, they
acknowledge that the robust first quarter might shave a little off the
typical spring seasonal surge. Banking, real estate, and service-sector
firms continue to plan for slow growth in 2012. In general, business
plans remained cautious; however, there was a noticeable lack of the
litany of risks and uncertainties as expressed by contacts over the last
six months.

Manufacturing

Since the last Beige Book, Third District manufacturers have
reported continued growth of new orders and shipments, although the pace
has slowed slightly. Gains were widespread among the makers of food
products, lumber and wood products, fabricated metals, industrial
machinery, and instruments. New apartment construction, rising auto
sales, and Marcellus shale activity are driving increased demand,
according to various contacts. A lumber firm expects growth but mostly
from market share gains. Manufacturers of food products and of chemicals
expressed concerns about the impact of rising fuel prices on their input
and output prices.

About nine out of 10 Third District manufacturers expect business
conditions to improve or stay the same during the next six months; firms
are evenly divided. Seasonal trends may be responsible for some of the
anticipated improvement, but the optimism is nearly uniform across all
major sectors. The usual litany of risks and uncertainties to the
outlook — typical over the past six months — was virtually absent from
current comments by manufacturers. However, caution remains;
expectations of capital spending and future hiring have changed little
since the last Beige Book.

Retail

Third District retailers reported modest growth rates overall but
expressed greater certainty that mild weather had played a significant
role in year-over-year comparisons. According to one contact, outlet
malls fared better than broad retail but they should have experienced
stronger sales. Gas prices pinched. While mild weather attracted more
people, the average purchase per store dropped from year-ago levels.
Overall, retail contacts see the economy firming but remain very
cautious.

Auto sales were robust in February for dealers in New Jersey and
Pennsylvania. For the first two months of the year, year-over-year sales
growth in New Jersey was reported to be higher than national growth
despite a soft January report. Pennsylvania contacts indicated that
March sales were strong but not as robust as in February. The outlook
for auto sales remains strong. However, contacts indicate that the rapid
first quarter pace may somewhat dampen the spring sales season, which
typically peaks in May or June. Modest hiring continues at select
dealers, but caution remains the trend.

Finance

Overall, loan demand has continued to grow slightly in the Third
District since the previous Beige Book; however, activity has been
uneven. Mirroring trends noted by other sectors, community banks note
that the strongest loan demand has been for inventories and capital
equipment to manufacturers and for investments in higher education,
health care, technology sectors, and multifamily housing. One large bank
contact noted strong demand from middle-market private equity firms,
while the pace of refinancing had diminished. Most contacts reported
solid credit quality.

Real Estate and Construction

Since the last Beige Book, residential builders have reported mixed
results for sales and hence for their construction activity
depending on the extent of distressed sales activity in their region.
Builders reported slower sales in southern New Jersey — where
foreclosure rates are the highest — but continued apace in
Pennsylvania. A Pennsylvania builder was more encouraged than at any
time in the past five years; the company is doing more hiring for sales
and for construction workers. One contact observed the resumption of
heavy flows of specialized construction trade workers on the roads
between Philadelphia area worksites and their Lancaster area homes; this
level of activity has been absent for five years. Residential brokers
reported strong, weather-aided year-over-year sales growth. The outlook
among builders and brokers remains somewhat more positive.

Nonresidential real estate activity has continued to slowly improve
since the last Beige Book, with few changes. The industrial real estate
market remains the strongest, followed by higher education, multifamily
residential investment, and activities related to Marcellus shale.
Philadelphia’s Center City office market is characterized by a
continuing trend toward consolidations and a growing trend toward
conversions to apartments. The overall outlook for nonresidential real
estate remains positive but modest.

Services

Most Third District service-sector firms have reported further
growth since the last Beige Book. Firms’ strongest demand emanated from
higher education and health-care institutions. Hospital systems reported
rising admissions. Staffing firms reported mixed results, with strong
orders from the manufacturing, health-care, and technology sectors.
Demand for general administration and for clerical workers has been
softer; however, clients were beginning to talk of hiring plans.
Service-sector firms anticipate that growth will steadily improve in
2012.

Prices and Wages

Price levels have changed little since the previous Beige Book —
remaining generally constrained. Some deals and promotions are beginning
to sap strong auto dealer pricing power. This was anticipated as
Japanese automakers resumed normal production levels. New federal
regulations, including medical certification requirements for commercial
drivers, have exacerbated truck driver shortages. Favorable pricing
power for freight shippers will push costs along to their customers and
end-users. As a recent study predicts, these high costs could rise even
further if the need arises to truck fuel to nearby markets that are
currently being served by pipeline from refineries that are being
closed. Price pressures have eased somewhat for manufacturing firms
since the last Beige Book. Retailers and homebuilders continued to
report tight margins with high, not rising, nonlabor factor costs. House
prices have fallen further; however, nonresidential rents are
stabilizing in some sectors. Contacts continued to report a lack of wage
pressures, other than for medical benefits.

** MNI Washington Bureau: 202-371-2121 **

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