• Pennsylvania's aggregate rate of job growth was slightly negative through third quarter 2003, but that belies job growth in the Philadelphia, Harrisburg, Lancaster, and Altoona metropolitan areas (MSAs). Offsetting the gains in those places are continuing losses in Pittsburgh and elsewhere in the western part of the state (see Chart 1). In fact, four of the state's five weakest cities in terms of job growth are in the western half of the state, including Johnstown, Erie, and Sharon, areas that have a higher concentration of manufacturing jobs.
  
  [D]
• Pennsylvania's manufacturing sector continues its slow recovery from deep recession (see Chart 2). In third quarter 2003, the sector shed 34,000 jobs, primarily in the western cities. The state's trade, transportation, and utilities sectors, industries closely linked to manufacturing, shed another 28,000 jobs. Other sectors are beginning to show strength, however, including the state's education and health services, information, and government sectors.
  
  [D]
• With the exception of the Philadelphia and Pittsburgh MSAs, which straddle the national rate, rates of home price appreciation among most of the state's other metropolitan areas have trailed the nation since the beginning of the recession in first quarter 2001 (see Chart 3). As a result, the amount of equity available to homeowners in those areas has not grown as rapidly as other parts of the nation and may, in part, limit the role of the consumer in the state's economic recovery.
  
  [D]
• Like many other cities, Pittsburgh is suffering from a budget crisis. The 2004 budget has a $42 million shortfall, and discussions are under way in the state legislature about establishing a financial oversight board. The city's municipal bonds were recently lowered to “junk” status by both Standard and Poor's and Fitch. Expectations are that a new taxing authority and possibly some assistance from the state legislature will be approved, which should alleviate some budget pressure.

• NIMs among the state's insured institutions continued to contract in the first half 2003 (see Chart 4). Historically low long-term interest rates have motivated borrowers to refinance debt in record numbers, while bank deposit costs have approached floors.
  
  [D]
• Long-term interest rates increased during the second half 2003, which contributed to steepening of the yield curve. While a steeper yield curve is traditionally positive for bank NIMs, the benefits tend to lag yield curve changes.
• The state's median ratio of long-term assets-to-average earning assets traditionally is above the nation's (see Chart 5). A large proportion of residential mortgage lenders (34 percent of the state's insured institutions specialize in mortgage lending) and the popularity of long-term mortgage products in metropolitan areas of the Northeast contributed to the higher ratio.¹ Insured institutions with high concentrations of long-term assets could face some margin compression, asset depreciation, and extension in asset duration should interest rates rise, thereby heightening the importance of proper interest rate risk management practices.
  
  [D]

• After slightly increasing, the past-due loan ratio among Pennsylvania's insured institutions held steady in the first half 2003 compared with the prior year. Loan delinquency rates remain lower than the nation's across loan categories, except for CRE loans (see Chart 6).
  
  [D]
• CRE concentration levels among the state's insured institutions have moderately increased. Between the second quarter 1998 and 2003, the percentage of the state's insured institutions with CRE loans to Tier 1 capital greater than 300 percent increased from 7.4 percent to 16 percent.
• CRE conditions worsened slightly in the state's two largest office markets in third quarter 2003. The office vacancy rate in the Philadelphia MSA jumped one percent to 16.9, equivalent to the national average. Philadelphia was characterized by increasing completions as well as negative net absorption. The vacancy rate in the Pittsburgh MSA increased slightly to 18.3 percent. Nevertheless, the state's CRE loan delinquency rate remains well below levels of a decade ago. Lower interest rates have enabled CRE borrowers to refinance at advantageous interest rates; however, financing costs may increase as rates rise. In addition, as office leases booked during the height of the economic expansion expire, new leases may be at lower rents.

¹"Residential lenders" are defined as insured institutions that hold at least 50 percent of assets in 1-4 family mortgage loans and mortgage backed securities.