Beige Book Report: Philadelphia
June 4, 2014
Aggregate business activity in the Third District grew at a modest pace during this current Beige Book period. Most sectors resumed the pace of activity that was evident before the recent winter disruptions. Auto sales surged with "phenomenal" growth in April -- rebounding yet further from the winter slump, while general retail sales resumed a modest pace of growth. Demand for general services maintained a moderate pace of growth over the Beige Book period, and staffing services continued to maintain a modest pace. After partially rebounding in the previous Beige Book period, the residential construction and real estate sectors posted slight declines in contracts for new homes and sales of existing homes. Noncommercial real estate fared better: Construction maintained slight growth with several large groundbreakings yet to come, and contacts noted a slight uptick in activity for office leasing. Manufacturers reported a modest increase in activity. Tourist destinations reported slight growth during this shoulder season between snow and sun. Lending volumes continued to grow 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.
Overall, contacts anticipated moderate growth over the next six months and continued to express confidence in the underlying economy. With regard to hiring and capital expenditure plans, firms are beginning to increase capital expenditures, especially to boost efficiency; some new hiring is occurring, but firms remain cautious.
Manufacturing
Since the last Beige Book, Third District manufacturers have reported further modest increases in orders and shipments. The number of industries reporting gains has generally expanded since the last Beige Book, although some reports reflected seasonal trends, and some firms indicated that the growth reflected a run-up related to a backlog of orders resulting from the harsh winter weather. Firms associated with automotive sales reported continued strong growth. A few firms associated with homebuilding and other construction reported continued weakness, despite the return of warmer weather. Overall, both durable and nondurable goods industries have generally shown expansion. As demand and production have increased, nearly one-half of the firms reported a mismatch between their firm's labor skill requirements and skills in the labor supply. About one-third of firms reported labor shortages, and one-third reported job vacancies open longer than three months. Skilled production machinists and tool, plant, and system operators were identified as most important to these firms.
Optimism among Third District manufacturers that business conditions will improve during the next six months has held steady since the last Beige Book and was evident across nearly all sectors. More than one-half of all firms anticipated increases in activity over the next six months; only about 15 percent reported expectations of lower activity. Nearly one-third of the firms reported that they anticipate higher levels of employment and capital expenditures in six months -- slightly less than during the last Beige Book period.
Retail
Third District retailers have reported continued improvement since the prior Beige Book period, with sales growing at a modest pace over the period. Year-over-year sales finished a little stronger than last year for April, although a March--April comparison (which eliminates the effect of Easter shifting between months) shows sales as relatively flat. Retailers continued to offer heavy promotions to move inventory, generating higher unit volume but lower unit pricing. Malls offered discounts from 30 percent to 50 percent. Early impressions for May were also good. An outlets mall operator reported that bus traffic was up 11 percent over this year, which represents a return of some consumers who have not made the trip since the recession began. Contacts mentioned a backlog of signed leases and rising lease activity. Retail development managers continued to describe great optimism for future deals in the remainder of 2014 and next year. New deals will mostly impact 2015.
Auto sales surged further during this Beige Book period, rebounding further from the weak sales posted in the first two months of the year. Dealers reported "phenomenal" sales in April following a strong month in March. Auto dealers remain bullish for the remainder of 2014.
Finance
Third District financial firms have continued to report slight increases in total loan volume since the last Beige Book. Commercial and industrial loan volume grew moderately, and home equity lines grew modestly. Mortgages and consumer credit lending (other than credit cards) grew slightly, while commercial real estate lending was reportedly down slightly. The volume of credit card lending was up throughout most of the Beige Book period (partially a seasonal trend). Banking contacts in several markets indicated that real estate lending picked up after the long winter. In particular, they noted that in some markets long dormant residential projects were starting back up. Other contacts mentioned strong sales at a recreational vehicle dealer that may indicate stronger consumer confidence and that may bode well for ongoing discretionary consumer spending. However, many bankers in smaller markets continued to describe small restaurants and small businesses as struggling with permanent losses after the long winter. Nearly all contacts described the commercial and industrial loan market as very competitive. Most reported steady improvement in credit quality and little change in lending standards. Overall, most bankers remained guardedly optimistic for growth through the remainder of the year. Most see confidence building among consumers and businesses; however, most small businesses remain very cautious.
Real Estate and Construction
After weathering the cold winter slump followed by a little pick up in March, Third District homebuilders reported a renewed slowdown. The strong spring sales season -- for which many Third District builders had hoped -- did not materialize. Instead, builders reported that contracts for new homes were well below last year's levels and even further below their 2014 plan. This is also true for their local competitors, large and small. One Pennsylvania builder indicated a general malaise, citing less customer traffic, more competition from existing homes sales, and a resurgence of concern among potential buyers that they would be unable to sell their existing homes. Residential real estate brokers reported some improvement in May; however, April sales were uniformly negative in most major markets on a year-over-year basis. Sales have been "doing quite well" in Center City Philadelphia, but less so in the suburbs. Contacts cited ongoing financing difficulties, as many market participants have lost equity in their existing houses or are under water. In addition, student loans have contributed to lower household formation rates. Throughout the Third District, brokers expect sales to improve, but they no longer expect to recapture all of the "lost" sales from the first four months of the year.
Nonresidential real estate contacts reported little change in the relatively low level of construction; however, some activity for surveying and inspections has fully returned to normal since the earlier winter disruptions. Some developers continue to build and lease industrial/warehouse space on a speculative basis, as demand remains strong in this market. Most other markets require signed contracts. One contact noted a small uptick in leasing activity for office space since the last Beige Book. Most contacts describe activity as slow and steady. They remain optimistic that construction activity will accelerate somewhat, as several large projects are breaking ground this year.
Services
Activity among Third District service-sector firms has maintained a moderate pace of growth since the last Beige Book. Service-sector firms reported mostly moderate growth rates, with roughly 60 percent reporting increased sales and about half reporting increased orders. One central Pennsylvania staffing firm reported that firms are making faster hiring decisions. More responding firms have added full-time and part-time staff employees than have trimmed staff levels. Overall, the vast majority of service-sector contacts are optimistic that the growth trend will continue over the next six months.
Tourism destinations maintained slight growth during the shoulder season between winter ski and summer shore activity. The prolonged winter weather was reported to have helped the ski resorts. Now it is reported to have also increased cabin fever and demand for summer getaways along the shore. Contacts from Delaware and New Jersey shore communities reported increases in early bookings for the 2014 season. Increased demand for hotel rooms in Delaware's coastal county has outpaced the increased supply since last year. New Jersey contacts reported that there is greater preparedness to welcome tourists this year than last following Hurricane Sandy. In addition, some boat owners are bringing their boats back to the shore following recession belt-tightening.
Prices and Wages
Overall, Third District contacts reported little change to the steady, slight pace of price level increases, similar to other recent Beige Books periods. About three-fourths of manufacturing firms reported no change in prices paid and prices received. However, a slightly higher percentage of manufacturers reported higher prices paid and higher prices received, while slightly fewer reported lower prices paid and lower prices received. About one-third of the manufacturing firms reported increasing wages to address their specific skills mismatches. Auto dealers reported little change in pricing, and general retailers continued to report heavy promotions. Many contacts continued to report tight, or narrowing, margins. Homebuilders have been forced to push back against higher material prices and have met with some success. Labor costs have been up a bit, but pressures have eased as their demand has fallen. Brokers reported slight, steady overall increases in home prices. Contacts among service-sector companies reported little change in labor costs.