September 3, 2014
Aggregate business activity in the Third District continued to grow at a modest pace during this current Beige Book period. The most notable changes in growth were reported among several consumer spending categories; these changes may have been triggered by unusually beautiful summer weather that delivered mostly sunny days (thus depressing retail spending but boosting tourism). In particular, contacts at tourist destinations throughout the District reported modest overall growth (greater than the slight growth seen last period) with stronger revenues for hotels, but mixed results for the tourist restaurants and shops. Contacts from nonauto retailers reported slight growth (slower than the modest growth last period), and auto sales decelerated to merely strong growth (from the very strong growth last period).
Service sectors maintained a moderate pace of growth overall, while staffing services continued to rise at a modest pace. Manufacturers also reported an ongoing modest rate of increase in activity. The commercial and residential real estate sectors continued to report slight overall growth during the current Beige Book period, both for construction and for sales and leasing of existing properties. Lending volumes continued to grow slowly over this period, and credit quality continued to improve. Contacts continued to warn of a slight increase in credit risks resulting from heated competition for loans. Overall, contacts reported slight increases in wages, home prices, and general price levels, similar to the paces reported for the previous Beige Book period.
Overall, contacts continued to anticipate moderate growth over the next six months. Generally, more firms expressed greater confidence in the economy and more overall optimism for growth. Several contacts professed relief in the relative absence of any "summer swoon," resulting in a reduced level of uncertainty.
Manufacturing
Overall, Third District manufacturers have continued to report modest increases in new orders and shipments since the last Beige Book with somewhat faster growth in the early part of the seven-week period than in the latter. Gains in activity continued to reflect demand from a broad base of sectors. Contacts specifically mentioned stronger demand from the auto, aerospace, energy, and railroad car sectors. Housing construction and capital spending on equipment and building repair were also mentioned as spurring some growth in new orders. Weak demand was cited from sectors that produce farm equipment, CDs and DVDs, and toys. In general, contacts expressed their belief that overall consumer confidence had improved, as had the confidence of their business customers.
Two-thirds of Third District manufacturing contacts expressed expectations that business conditions would improve during the next six months; none anticipate deterioration. This represents significantly greater optimism than during the last Beige Book period. However, a somewhat larger percentage of firms now expect to reduce employment levels over the next six months, and a somewhat smaller percentage expect to increase their level of capital spending.
Retail
Since the prior Beige Book period, contacts reported slight growth in nonauto retail sales in the Third District overall--somewhat slower than last period's modest pace. Results were mixed throughout the period and among retail types. An operator of area malls reported a pickup in activity in August after a "flattish" July. Growth in activity was greatest for family and back-to-school shopping in areas where schools started early. Apparel sales were boosted by relatively cool August weather that helped to focus shoppers' attention on new fall inventories. An outlets operator reported moderate to strong sales growth for July but that one mid-August weekend was flat. However, the outlets operator stated that this has been "the most positive summer since 2007" and that retailers are not seeing the deep discounting (of up to 50 percent) that was evident last summer. Contacts remain optimistic; one stated that retail health is generally better than it was before the recession. Contract talks for future leases are beginning to look out to 2016. Meanwhile, fewer lease deals are stagnating as more retailers are proceeding with their existing lease plans.
The very strong pace of auto sales reported in the prior Beige Book period appears to have softened to merely strong growth as the current Beige Book period draws to an end in August. In Pennsylvania, July was reported as a record month for statewide auto sales. However, sales appeared to be backing down during the first two weeks of August. One contact suggested that dealers sometimes begin running out of inventory at this time of year. New Jersey contacts reported that year-over-year growth rates of auto sales moderated throughout this Beige Book period, following very high rates reported during the prior Beige Book. Dealers remain very optimistic for continued strong sales levels through 2015.
Finance
Third District financial firms have continued to report slight increases in total loan volume since the last Beige Book. Demand increased most for consumer credit lines, such as credit cards and auto loans. Demand for home mortgages and home equity lines continued to grow, but the gains were slower, and some contacts reported falling demand for refinancing loans. Reports of demand for commercial and industrial loans were mixed. The market for commercial real estate appears to have changed little. Banking contacts generally reported ongoing steady improvement in credit quality and their loan portfolios, but they continued to warn of competition leading to an increase in risk taking. Customers have a "strengthening sense of stability" and greater optimism, according to several banking contacts. In particular, capital spending by businesses has picked up a bit; however, enough caution remains to constrain much new hiring.
Real Estate and Construction
Third District homebuilders have reported little change in sales overall since the last Beige Book period, although results are mixed across the District. A New Jersey builder reported another weak month in July but noted a slight pickup in August. In Pennsylvania, a north-central builder credited shale gas money for prompting greater-than-normal numbers of contract signings in July and August. "First-time homebuyers are nonexistent," according to a south-central homebuilder who reported that this August is worse than last year. Residential real estate brokers reported continued slight improvements in sales this period on a par with the prior Beige Book period at the beginning of this summer season. However, on a year-over-year basis, most major markets remain somewhat weaker. Central Pennsylvania is an exception with slight increases reported for existing homes sales in the Harrisburg area. Declines in the Greater Philadelphia area were smaller than during the last Beige Book period; declines in the Jersey Shore area were greater. A major Philadelphia-area broker expressed little change in activity from the last Beige Book period, reiterating that sales were definitely doing better than they were earlier in the year and that higher-priced homes were selling slowly but all other homes were moving quickly. Brokers remain optimistic for further improvement in 2015.
Nonresidential real estate contacts reported that growth in construction activity and in leasing activity have changed little from the slight pace seen in the previous Beige Book period. Construction activity continues to be greatest for industrial/warehouse building projects, which get snapped up quickly when built on spec. An architecture and engineering firm reported that this has been a good summer. Contacts also reported improved leasing activity in southern New Jersey for small offices as well as industrial buildings. However, firms reported few signs of rents strengthening in most office markets and cited continued weak growth in service-sector employment.
Services
Third District service-sector firms have continued to report moderate growth in activity since the last Beige Book. About one-third of all firms reported increases in new orders and sales. Although fewer firms this period reported increases, many firms reported that their current lull or slowdown is seasonal. Several large service companies reported generally steady growth and a greater sense of economic certainty for themselves and their clients. Some staffing contacts in New Jersey and Pennsylvania reported that they are adding new clients, and that firms are hiring to grow their businesses, not just replacing staff. Staffing firms were upbeat about prospects for the remainder of the year. Over three-fourths of the service-sector contacts reported expectations that growth trends will remain positive over the next six months.
Tourist areas in the District benefited from great weather conditions throughout most of the summer. Accordingly, most contacts reported modest gains overall. For some areas, including the Pennsylvania Dutch area and much of the shore, visitation was up from a year ago. Two Lancaster hotel operators experienced their highest occupancy rates since 2008 and their highest average daily room rates since 2006. A Delaware shore hotel operator had "one of its best Julys ever, and best month of August, too." Traffic was reported as down in Atlantic City because of the struggling casinos, and in a few parts of Ocean County, the rental market is still below pre-Sandy levels; however, most of the southern Jersey Shore communities experienced strong summer bookings. Despite greater numbers of tourists, spending at restaurants and shops in tourist areas continues to be soft as households are watching their overall budget. Tourism contacts remain generally positive regarding prospects for the fall.
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. Less than one-third of the manufacturing firms reported an increase in their input costs--a smaller fraction than in the prior Beige Book period. The percentage of firms reporting higher prices for their own products also fell. About one-fourth of the service-sector firms reported an increase in prices paid and received--slightly fewer than last period. Auto dealers reported little change in pricing. Brokers continued to report slight overall increases in home prices. Some contacts continued to report tight margins. Several homebuilders reported increasing difficulty finding specialty trade contractors. Overall, contacts among service-sector companies reported little change in labor costs. Generally, contacts reported that hiring remains cautious--occurring when necessary for replacement or for some incremental growth; however, some staffing firms noted more hiring for expansion than during the previous Beige Book period.