Beige Book Report: Philadelphia
January 15, 2014
Aggregate business activity in the Third District continued to rise at a modest pace during this current Beige Book period (beginning with the last full week of November). Reports from most sectors changed little. However, auto dealers reported somewhat slower growth at a moderate pace, and existing home sales slowed further than expected, to a slight pace for the winter season. Sectors that continued to expand at a modest pace included general retail sales, tourism, and commercial real estate leasing. Residential and commercial real estate construction and manufacturing continued to expand only slightly. The broad general services sector continued to grow at a moderate rate and transportation services were described as "booming." Loan volumes at Third District banks continued to grow at a modest pace across most categories, and credit quality continued to improve. Contacts reported little change to the slight overall increases in wages, home prices, and general price levels--similar to the last Beige Book period.
Despite a slower pace of growth in some sectors, contacts overall maintained an outlook for moderate growth--similar to the last Beige Book. Contacts in most sectors continued to express confidence in the underlying economy. Confidence was bolstered for some as the climate for a less volatile federal fiscal policy seemed to improve. In regard to hiring and capital expenditure plans, firms continued to expand cautiously and will do so until the pace of growth strengthens and exhibits sustainability; in addition, they face ongoing uncertainty from implementation of the Affordable Care Act.
Manufacturing
Third District manufacturers have reported continued increases in orders and shipments at a slight pace of growth overall since the last Beige Book. The share of all firms reporting increases or decreases in general activity was about the same as before, with nearly one-third reporting increases in general activity and a little less than one-fourth reporting decreases. The makers of food products, fabricated metals, and industrial machinery have reported gains since the last Beige Book. Reports of decreases came from the makers of paper products, chemicals, and electronic and other electric equipment. Some firms noted the impact of seasonal trends on business, which were positive for some but negative for others. One contact reported, "We are experiencing the usual holiday increase, but not at the levels of previous years." Most firms reported steady conditions.
Optimism that business conditions will improve over the next six months remained high and was widespread across sectors. Over half of the firms continued to anticipate increases in activity, though some firms expected decreases in activity, new orders, and shipments. Optimism is also evident from two recent announcements: a Pennsylvania-based firm will acquire one of China's largest confectioners--greatly expanding its market presence in Asia, and a large Chinese firm announced $40 million of investments in Pennsylvania--$30 million to build a high productivity (heavily automated) 500-employee manufacturing plant in the Harrisburg area (products were unspecified), plus $10 million for research in collaboration with a Pittsburgh-based university. Firms also expected to see the largest increase in health benefits costs compared with other input and labor costs in 2014. Though still positive overall, contacts have reported lower expectations of hiring and capital spending plans since the last Beige Book.
Retail
Third District retailers have continued to report modest growth overall since the last Beige Book. According to one contact, the shorter holiday shopping season and the winter weather disruptions created more motivated buyers: "Traffic was down about 10 percent in December, but the average purchase almost doubled." Retailers reported that people bought more "gifts for the home" this holiday season; the home improvement segment had been largely overlooked since the recent recession. Jewelry and cold-weather wear also sold very well this season. Some retail contacts reported lower inventory levels in the wake of the holiday sales--a good problem that may reduce January sales. Results of the post-holiday gift card sales remain uncertain. Retailers remain optimistic for 2014. Outlets operators anticipate opening seven to 10 new centers this year.
Auto dealers have reported a moderate pace of sales since the last Beige Book period--a little off the strong growth they reported for most of the past year. Pennsylvania dealers reported that sales fell off the year's pace in November but remained a little better than last year; December sales were "just OK," although the final week was strong. New Jersey dealers reported that December sales were slightly softer than a year ago; however, last year's sales were boosted by sales of replacement vehicles in the aftermath of Hurricane Sandy. Year-end sales in 2012 were also strong due to higher-than-normal year-end bonuses and to accelerated purchases for tax purposes. The outlook for 2014 is very positive; however, some retailers are beginning to take note that the pent-up demand accrued during the recession may be abating.
Finance
Overall, Third District financial firms continued to report modest increases in total loan volume. Most loan categories appeared to grow somewhat; however, contacts reported slight decreases in commercial real estate loan volumes and some small consumer credit lines. Credit card utilization increased seasonally for holiday shopping and grew through the month of December at a slightly faster pace than last year. Contacts were heartened by "better economic news" and a sense of "greater government fiscal stability." However, some continued to express caution--for their part and on behalf of their customers--that they need to see a sustained pickup of activity, especially among small businesses. Contacts continue to see credit quality improvement; one expressed an expectation that as mortgages flow into the seriously delinquent category, they will perform better than those from the recent past. "Many of these newer loans will cure," as the job market is improving, housing is appreciating again, and the underwriting is better. Overall, most bankers remained optimistic for continued slow, steady growth and an opportunity for some acceleration.
Real Estate and Construction
Third District homebuilders have reported that construction has continued at a slight pace of activity since the last Beige Book. One builder reported significantly greater activity in the past few weeks after securing a partially developed subdivision on which to build. Land acquisition at marketable prices remained an oft-cited challenge. Competition for labor from rebuilding projects along the Jersey Shore remained a problem for New Jersey homebuilders; in central Pennsylvania, the labor availability has improved somewhat, as competition from Marcellus shale activity has abated. According to residential real estate brokers, sales of existing homes declined (year over year) in most of the Third District's major metropolitan areas. Reported decreases ranged from barely negative in southern New Jersey and the Lehigh Valley to about 10 percent in the Harrisburg and Philadelphia metropolitan areas. However, reports of pending sales remained positive, and the inventory of homes for sale continued to fall in most markets. Contacts remained bullish for a "continued, gradual rise" in 2014 despite the somewhat deeper lull than is normal for December.
Nonresidential real estate contacts indicated little change in the slight growth rate of construction and the modest pace of overall leasing activity during this seasonally slow period of the year. New construction of industrial warehouse buildings remains in strong demand, as does new construction of institutional buildings. The summer/fall of 2014 is slated to bring groundbreakings for two major 47-story construction projects: an office/residential tower in University City Philadelphia anchored by the corporate headquarters of a specialty chemical firm and a hotel/condominium tower for Center City Philadelphia. Based on these and other projects, most contacts reported good results for their respective firms in 2013 and expectations for stronger growth in 2014.
Services
Third District service-sector firms continued to report a moderate pace of growth, and tourism received a boost from an early winter snowstorm. Overall, more firms reported increases in sales and new orders than reported decreases, although the trend was slightly less positive than reported in the last Beige Book. The early December storm that interrupted retail shoppers laid a solid base of snow for mid-Atlantic ski resorts; tourism along the Delaware and New Jersey shores remains seasonably slow.
Other service firms reported modest to moderate growth rates. Business information technology service contacts reported strong activity, while contacts for defense-related firms continued to adjust staffing for lower budget allocations. A transportation services contact described "booming" growth for most modes and support facilities in the primary corridor through central and eastern Pennsylvania that serves the Northeast. A concern was expressed that small manufacturers could be forced into costly plant shutdowns if shippers were unable to expand rapidly enough to meet demand for intermediate goods from a potential economic surge. Overall, nearly all service-sector firms reported an expectation that current activity will continue to increase.
Prices and Wages
Overall, Third District contacts reported no change to the steady, slight pace of price level increases, similar to other recent Beige Books. Manufacturing firms reported that prices paid and prices received tended to once more rise slightly. Auto dealers and general retailers reported little change in pricing, and most builders reported holding prices steady. Many contacts reported coping with tight, or narrowing, margins. Generally, real estate contacts continued to report rising prices for lower-priced homes, while higher-priced homes are aligned to local market conditions. Very few contacts are seeing wage pressures, other than for a few highly skilled occupations.