Beige Book Report: Philadelphia
March 5, 2014
Severe winter weather caused aggregate business activity in the Third District to decline slightly during the current Beige Book period (beginning with the first full week of January). Nearly all sectors were impacted; however, only a few sectors are expected to suffer permanent losses, according to contacts. For example, while many general retailers have had to realize their losses by heavily discounting their winter inventory, auto dealers anticipate a release of pent-up demand when spring arrives.
The general services sector was the only one to maintain some growth in this period, but even it slowed to a modest growth rate. After growing in the previous Beige Book period, general retail sales and residential construction declined moderately; auto sales, existing home sales, and commercial real estate construction declined modestly; and manufacturing, commercial leasing activity, and tourism declined slightly. Staffing services showed little net change after growing modestly over previous periods. Lending volumes also changed little change this period but credit quality continued to improve. Contacts reported slight overall increases in wages, home prices, and general price levels--similar to the last Beige Book period.
Despite the temporary declines in many sectors, most contacts remained optimistic although they now expect only modest growth over the next six months. Contacts in most sectors continued to express confidence in the underlying economy. In regard to hiring and capital expenditure plans, firms continued to expand cautiously.
Manufacturing
Third District manufacturers reported deteriorating levels of activity through the current Beige Book period, as severe winter weather repeatedly disrupted sales and production. A slight pace of growth in orders and shipments as reported for the last period continued for several weeks then gave way to slight overall declines by the end of this Beige Book period. The share of all firms reporting increases in general activity fell from about one-third to one-fourth, while the share reporting decreases rose from about one-fourth to one-third. The makers of paper products, fabricated metals, industrial machinery, and instruments have reported gains since the last Beige Book. Reports of decreases came from the makers of food products, chemicals, primary metals, and electronic and other electric equipment. About 40 percent of manufacturers cited negative impacts from the severe winter weather, including lower demand or sales, disruptions to supply channels and to deliveries, fuel and power outages, lost production days, and cost of snow removal.
Optimism that business conditions will improve over the next six months remained nearly as high as last period and continued to be widespread across sectors. Over half of the firms continued to anticipate increases in activity; however, firms were somewhat less optimistic about new orders and shipments six months out. Contacts reported similar expectations of future hiring and greater expenditures for future capital spending plans than during the prior Beige Book.
Retail
Third District retailers reported that malls and stores lost shopping days to snow storms and power outages, including significant holiday weekends, resulting in an overall moderate decline in sales since the last Beige Book. According to one mall contact, Valentine's Day weekend typically accounts for 40 percent of February sales, but the holiday's sales were off 40 percent this year due to a weekend snowstorm. Retailers have engaged in heavy discounting to move winter gear due to a dearth of shoppers. Also, spring inventory is not moving yet. In addition, retailers' margins have eroded from higher heating bills and snow removal costs. Brick-and-mortar retailers expressed uncertainty as to whether consumers have held on to their holiday gift cards or used them at online retailers. Although most of the lost sales opportunities are gone, retailers are hopeful that some pent-up demand will emerge as temperatures rise and that the prior pace of retail sales growth will resume.
Auto dealers have reported a modest decline in sales since the last Beige Book period--another casualty of the recurring winter snowstorms. Dealers' lots were covered with snow; car buyers were scarce. Pennsylvania dealers expect sales to be off at least 15 percent (year over year) in February, while January sales were up a little. New Jersey dealers reported relative softness, adjusting for seasonal trends through January, although last year's comparative sales were boosted by replacement vehicles following Hurricane Sandy. Contacts in both states described dealers as currently "pretty grouchy, but upbeat for the year." Auto dealers harbor greater hopes than general retailers that spring sales will capture pent-up demand from the winter losses. The outlook for 2014 remains positive.
Finance
Third District financial firms reported little overall change in total loan volume. Many loan categories appeared to decline slightly in volume. Credit card lending fell faster; however, that is a typical seasonal trend as consumers pay down their post-holiday balances. In contrast, other consumer credit loans and home equity lines have grown slightly since the last Beige Book period. Contacts continued to characterize the lending environment as steady, very slow, and highly competitive. Real estate lending softened considerably as the wintry weather reduced the pace of new contracts. Despite this current softness, contacts described an improving lending environment with a stronger labor market, greater consumer confidence, and healthier balance sheets. Overall, most bankers remained optimistic for continued slow, steady growth and for some pickup from pent-up demand for housing, autos, and other loans when the spring thaw finally arrives.
Real Estate and Construction
Third District homebuilders have reported that both new home sales and construction activity were depressed by the unusually severe winter weather, generating moderate declines from the prior-period construction levels. One builder reported production at 60 percent of plan, while sales were only about 50 percent of plan. Builders expect to accelerate production and catch up with prior schedules as the weather permits, and they are hopeful that spring sales may rebound. However, extra overtime coupled with increased demand from future sales may create labor shortages and escalate other input costs. According to residential real estate brokers, sales of existing homes were flat to down (year over year) in many of the Third District's major metropolitan areas in January. Pending sales and new listings were also reported as declining at a modest pace; February closings, traffic, and sales are expected to be negative throughout most of the District. Brokers are somewhat less bullish for a significant increase in 2014 over 2013 levels.
Nonresidential real estate contacts indicated some weather disruptions have delayed ongoing construction activity. Modest declines in current construction are expected to be offset in the near future as contractors hustle to resume their schedules. Leasing activity was quiet--as businesses were often shuttered--but is expected to resume its modest pace next period. Little change was reported in leasing activity. Two more major buildings were announced for Center City Philadelphia since the last Beige Book: a 59-story major office tower and a 32-story residential tower. Added to the two 47-story office/residential towers already slated for groundbreaking in 2014, these four projects have caused most contacts to become increasingly optimistic for stronger growth as the year progresses. Meanwhile, most contacts speak of incremental improvement, despite the winter lull.
Services
Third District service-sector firms have slowed to a modest pace of growth since the last Beige Book--again with weather dampening demand for a variety of services. Although the District's ski resorts benefited from the additional snowfall, even they were plagued by the storms' timing, which made travel to the resorts difficult on several weekends. In addition, school districts that have amassed too many snow days may shorten spring breaks resulting in cancelation of vacation bookings. Some have already interfered with the Presidents' Day weekend by holding classes.
Other service firms reported mostly modest growth rates--whittled down from recent moderate rates, as heavy snowfalls and power outages prevented workers from commuting and businesses from opening. As with general retail, some of the service-sector revenue will not be recouped after the snow has melted. For example, staffing firms cite the loss of billable hours that will not be made up. Other segments of the staffing industry offset those losses with slight growth. Overall, most of service-sector losses were viewed as manageable, and most contacts expect current activity to resume and grow.
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 rise slightly, but more modestly than before. Auto dealers reported little change in pricing, general retailers reported deep discounting, and most builders reported holding prices steady. Many contacts continued to report 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.