Beige Book Report: Philadelphia
April 16, 2014
Aggregate business activity in the Third District grew at a moderate pace during this current Beige Book period. Many sectors rebounded to various degrees from the economic disruptions caused by severe winter weather in January and February. Auto sales rebounded robustly over the Beige Book period, returning sales to levels above one year ago. General retail sales contacts reported moderate growth that helped bring sales levels even with the prior year's levels. Demand for general services accelerated to a moderate pace of growth; staffing services reported slight gains. After declining in the previous Beige Book period, the construction and real estate sectors rebounded sufficiently to resume a slight pace of growth. Manufacturers also reported slight growth similar to what they had reported before the severe winter weather. An extended ski season helped winter tourist destinations to do well, while reports from the shore destinations were mixed during their off-season. Lending volumes grew slightly over this period, and credit quality continued to improve. Overall, contacts reported slight increases in wages, home prices, and general price levels, similar to the last Beige Book period.
Since most sectors seem to be resuming their trends from before the recent winter disruptions, most contacts are as optimistic as before, if not more so. Overall, contacts anticipated moderate growth over the next six months and continued to express confidence in the underlying economy. In regard to hiring and capital expenditure plans, firms are beginning to increase capital expenditures to boost efficiency, but they continue to approach new hiring with caution.
Manufacturing
Third District manufacturers reported that levels of activity rebounded with a slight overall increase during the current Beige Book period, following the previous decline that had been attributed to frequent, severe weather disruptions. New orders and shipments grew slightly this period after falling slightly last period. The share of all firms reporting increases in general activity rebounded from about one-fourth to one-third, while the share reporting decreases fell from about one-third to one-fourth. The makers of food products, lumber and wood products, chemicals, primary metals, and electronic equipment have reported gains, rebounding from the flat or lower activity they reported during the last Beige Book period. They join the makers of paper products, fabricated metals, and industrial machinery that have reported gains for both periods. A mixed report came from the makers of instruments during this period. Firms that reported stronger growth attributed much of the demand to growth in the auto- and housing-related sectors. Some increased demand is reported to stem from the desire of some big-box retailers to have access to a broader domestic supply chain.
Optimism that business conditions will improve over the next six months remained high and continued to be widespread across sectors. About half of all firms continued to anticipate increases in activity; however, slightly more firms than before (now, about one-sixth) reported expectations of lower activity. About one-third of all firms reported that they anticipate higher levels of employment and capital expenditures in six months--up from one-fourth in February. Nearly half of all firms anticipate that overall capital expenditures for 2014 will be higher than they were in 2013. While most firms reported that their capital expenditures focus on technology to increase their plant productivity with few new hires, a few firms reported plans to increase both their plant and staff size.
Retail
Third District retailers reported a healthy rebound from the prior Beige Book period when sales slipped below plan and below the prior year. Retailers reported that sales grew at a moderate pace over the period and finished about even with last year. Stronger sales were observed despite ongoing poor weather that continued to limit sales potential and prompted continued heavy promotions to move inventory. Contacts also explained that year-over-year comparisons would be positive if one adjusted for the early Easter activity that was included in 2013 sales. Moreover, contacts described traffic returning to stores, reporting that the last Saturday of March was "tremendous," despite rain and snow, and restaurants were packed. Retail development managers described strong optimism for new deals over the remainder of 2014 and into next year. Contacts mentioned rising rents for lease renewals, higher capital expenditure plans for new stores, and greater attendance and enthusiasm at deal-making conferences.
Auto sales rebounded robustly during this Beige Book period compared with the prior period when winter weather took a significant toll on sales. Dealers reported that sales grew at a strong pace, especially during several good weekends in March; the last week of March was "about as good as it gets." According to one large dealership, its sales force closed on 30 to 40 vehicles per salesperson in March. Auto dealers remain bullish for 2014. In addition to expecting to capture more sales lost to winter weather, dealers cite increased credit availability, demand for leasing, and the still-high average age of cars as factors for their optimism.
Finance
Third District financial firms have reported slight increases in total loan volume since the last Beige Book. Commercial and industrial loan volume grew modestly, and commercial real estate loans grew slightly. Other real estate loans, such as home equity lines and mortgages, changed little. Volumes of credit card lending and other consumer credit loans fell throughout the Beige Book period (until the last week); however, those declines are typical of the seasonal trend following the winter holiday credit run-up. Overall, banking contacts described increasing consumer confidence, stronger middle market lending, but continued reluctance by small businesses to extend themselves with hiring or new investments. There were some exceptions, however: Some small businesses in healthier markets began to hire, while other markets with continuing high foreclosure rates struggled to grow at all. In healthier markets, housing prices have firmed, appraisals have strengthened, and credit quality has improved. Overall, most bankers remained optimistic for growth through the remainder of the year; however, markets were divided between those who believed the economy had turned a corner and others who continued to see a slow bleed of population and business in their local market.
Real Estate and Construction
Third District homebuilders continued to report weather-related disruptions to new home sales; however, customer traffic and construction activity grew enough to resume more normal levels. One builder reported a "decent" number of contract signings in March but stated that contract closings for the entire first quarter were well below last year and even further below plan for this year for them as well as for other area builders. Most builders, large and small, expect to see a strong spring sales season in part due to growing pent-up demand from winter as well as the slowly improving economy. Some builders are using their own cash to build more speculative homes, anticipating that potential buyers will make faster decisions on a finished property than on a build-to-suit home. According to residential real estate brokers, sales activity grew somewhat from the prior Beige Book period; however, March contract numbers were still not good. Sales of existing homes were down (year over year) in most of the Third District's larger metropolitan areas in February. Pending sales and new listings were also reported as declining at a modest pace, except along the Jersey Shore where listings were up slightly but only when compared with the quiet market that prevailed after Hurricane Sandy. Throughout the Third District, brokers expect to recapture some portion of the "lost" sales over the next three months; however, some potential buyers from the first quarter of 2014 may defer a decision until 2015.
Nonresidential real estate contacts indicated slight increases--representing a resumption of nearly normal activity following disruptions from the more severe weather of the prior period. Ongoing commercial construction resumed a low level of activity but is expected to ramp up this summer, as several major projects are expected to break ground. Leasing activity also rebounded slightly with the greatest activity (and lowest vacancy rates) for offices in the Philadelphia central business district and the Lehigh Valley. Despite the ongoing slow job growth of firms that fill office space, most contacts remain optimistic for stronger growth as the year progresses.
Services
Activity among Third District service-sector firms accelerated to a moderate pace of growth since the last Beige Book. Ski resorts and other winter tourist destinations reported a stellar season and one of the longest ski seasons for many resorts. Some mountain resorts have been able to extend the ski season almost up to the opening of their golf season. Contacts along the shore destinations provided mixed reports regarding tourist traffic over the slow winter season. Responses were more uniformly positive regarding early bookings for the summer season. A few contacts from both mountain and shore resorts reported that many summer weekends are already sold out.
Other service-sector firms reported mostly moderate growth rates, with almost half reporting increased sales and over 40 percent reporting increased orders. Staffing firms that lost billable hours during weather-related business closings reported modest growth--resuming their previous trend. One central Pennsylvania firm reported seeing a lot of hiring activity across all sectors of the economy and deemed that growth to be sustainable. Overall, the vast majority of service-sector contacts are optimistic that the growth trend will continue over the next six months.
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 periods. Manufacturing firms reported that prices paid and prices received tended to rise slightly, about the same as last period. Auto dealers reported little change in pricing, general retailers reported ongoing promotions, and most builders reported holding prices steady, if they were not offering specials. 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. Several contacts reported that appraisals are starting to support local sales offers. Very few contacts are seeing wage pressures, although labor market tightening was observed in some smaller central Pennsylvania markets.