Beige Book Report: Philadelphia
July 16, 2014
Aggregate business activity in the Third District grew at a modest pace during this current Beige Book period, with few changes from the prior period. Auto sales continued at a very strong pace of growth. Service sectors maintained a moderate pace of growth overall, as did demand for transportation services, specifically. Nonauto retail sales and staffing services continued to rise at a modest pace, although there are signs that momentum is building for stronger growth in the remainder of the year. Manufacturers also reported an ongoing modest rate of increase in activity. Tourist destinations continued to report a slight rate of growth, hampered once more by the storms of the past winter that prolonged the school year for many throughout the mid-Atlantic states. Real estate sectors all reported slight overall growth for the current Beige Book period. Builders and brokers reported that residential construction and real estate sales were showing signs of slight increases off of the low levels seen in prior months. Relatively little change in the sector's slow growth rate was noted by contacts from commercial construction; however, contacts are optimistic for the near future as groundbreakings for the first wave of several large projects have recently occurred. Contacts reported a slight lull in leasing activity. Lending volumes continued to grow slowly over this period, and credit quality continued to improve. Some contacts suggest that credit risks are rising with heated competition for loans. 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. Moreover, they generally expressed greater confidence in the underlying economy than in recent periods from their own perspective and from that of their consumer and business customers. About one-third of all firms reported plans to increase employment and to make additional capital expenditures over the next six months. For smaller businesses, such plans are likely to be realized on a very incremental basis.
Manufacturing
Third District manufacturers have continued to report modest increases in orders and shipments since the last Beige Book. Gains in activity continued to reflect demand from a broad base of sectors. Specifically, demand from the auto, aerospace, and energy sectors continued to rise, as did orders from China. Demand from Europe was seen as mixed by manufacturers. Several contacts mentioned some growth originating from residential construction, although they tended to focus on the demand for manufactured housing. Energy-related growth is particularly strong from demand generated by efforts to bring Marcellus shale gas to markets.
Expectations among Third District manufacturers that business conditions would improve during the next six months became more prevalent with more firms expecting increases and fewer firms expecting decreases. Moreover, one-third of firms reported that they anticipate higher levels of employment and capital expenditures in six months--slightly more than during the last Beige Book period.
Retail
Contacts have continued to report modest growth of retail sales in the Third District since the prior Beige Book period. Year-over-year sales comparisons were generally positive for both May and June--the best combined two-month result this year so far. For June, an outlets mall operator reported one of the best year-over-year sales results this year. Growth was highest for retailers of children's clothing and for shoes. Sales were off for the home furnishings category. This decline was attributed to the end of the tax refund season and interpreted as evidence that households will spend for the home when they have windfall income. Various contacts continued to report that smaller, family-run restaurants and retailers, especially in smaller market areas, are often still struggling to stay in operation. However, one contact noted a return of retail investment to strip center spaces that have been vacant since the recession. Contacts are generally optimistic that the recent retail sales gains will continue.
Auto dealers continued to report very strong sales through May and reported further strengthening into June. Dealers repeated their emphasis on staying lean, with cautious incremental hiring, which is helping to generate ongoing profitability. Sales are expected to remain strong throughout the remainder of the year, according to dealers--exceeding 2013 by as much as 6 percent to 9 percent.
Finance
Third District financial firms have continued to report slight increases in total loan volume since the last Beige Book. While some growth was indicated in all broad categories, demand increased most for consumer credit lines, such as credit cards and auto loans. Home equity lines also grew, but gains were slower due to ongoing payoffs of prior balances by more cautious borrowers. Contacts reported continued demand for commercial and industrial loans joined by ongoing fierce competition to secure the business. The market for commercial real estate and home mortgages, especially refinancing, remains much softer than other lines. Most banking contacts continued to report steady improvement in credit quality and loan portfolios. However, heated competition among banks to secure new loans has led to increased warnings of "too-risky" loan terms. Overall, bankers expressed greater optimism for general economic growth--tending to report a growing confidence among businesses and consumers alike. One contact stated that this is the most optimistic he has felt since the recession began. However, cautious tendencies continue to dominate most business decisions.
Real Estate and Construction
Third District homebuilders reported little change in sales from the last Beige Book period when a general malaise had dampened hopes for a strong spring season; however, construction has picked up. A New Jersey builder reported that he had salvaged May with end-of-month contract signings and was seeing a little increase in sales activity in June but from very low levels. One Pennsylvania builder continued to report slow sales and cited the overall weakness in the resale market. Despite low sales, builders from both states stated that their construction crews were now pretty busy; the poor winter weather had held up most of their active jobs. Residential real estate brokers reported slight improvements in sales in June. Although May sales were still negative in most major markets on a year-over-year basis, a major Philadelphia-area broker reported doing significantly better than plan in June and expressed hope that he might yet end even for the year. The broker stated that at least part of the ongoing difficulty stemmed from the tightness of inventory of lower-value homes.
Nonresidential real estate contacts reported that growth in construction activity changed little from the slight pace seen in the previous Beige Book period; the growth of leasing activity dropped back to a slight pace from the more modest growth observed in the prior period. However, construction activity is expected to accelerate throughout the second half of this year and the first half of 2015 because several major projects have recently broken ground and more will do so in the third quarter. The market for industrial/warehouse space remains strong throughout much of the Third District and one contact thought there was finally some firming in demand for Class A office space in the Philadelphia market overall.
Services
Third District service-sector firms continued to report moderate growth in activity since the last Beige Book. A little over half of all firms reported increases of new orders and of sales. Demand has continued to increase at a moderate rate for truck shipping loads with capacity utilization levels approaching a tipping point that could spark sharp price increases and greater efforts to expand capacity. Staffing contacts continued to report a modest pace of growth; however, they were more upbeat as their activity included many new hires for permanent placements. Overall, the vast majority of service-sector contacts reported expectations that the growth trend will continue over the next six months.
Contacts from tourist areas continued to report a slight rate of growth overall. Prolonged school years in many districts reduced some tourist activity at summer's start from the mountains to the sea. Jersey shore contacts reported somewhat stronger activity as they complete their return to full capacity following Hurricane Sandy. Contacts along the Delaware shore communities reported somewhat flat activity compared with last year, but for many, 2013 was a banner year. Mountain resorts also reported somewhat flat activity for May and June compared with last year. Several contacts continued to report that maintaining tourist numbers has not translated into comparable sales gains for area restaurants and retailers. Many visitors are maintaining tighter budgets while on vacation. All of the tourism contacts remain generally positive for future growth.
Prices and Wages
Overall, Third District contacts reported little change to the steady, slight pace of price level increases, similar to other recent Beige Book periods. The percentage of manufacturing firms reporting an increase in their input costs rose from about one-fourth to about one-third. However, the percentage of firms that increased their product prices barely budged, while a greater percentage of firms reported decreasing their own prices. Overall, prices paid and received by service-sector firms changed little from last period, with about one-third of firms reporting increases. Auto dealers reported little change in pricing. Many contacts continued to report tight, or narrowing, margins. Homebuilders reported that costs have been relatively flat over the last three months. Brokers reported slight, steady overall increases in home prices. Contacts among service-sector companies reported little change in labor costs. One staffing company serving a growing metro area reported that the wage scales across multiple job codes for a major contract renewal were unchanged from two years ago. The contact stressed that there was "no shortage of labor." Another staffing company contact from a smaller, growing metro area reported that wages were going up but that "clients were nonplussed." Overall, contacts reported that hiring occurs when it's necessary for replacement and for some incremental growth, but firms are much more cautious about hiring to expand capacity.