Beige Book Report: Philadelphia
October 15, 2014
Aggregate business activity in the Third District continued to grow at a modest pace during this current Beige Book period with very few shifts in the growth rates of specific sectors. The most notable change in growth was reported by staffing companies, which experienced further increases in staffing requests for temporary and permanent positions. Overall, service sectors maintained a moderate pace of growth. Nonauto retailers continued to report slight growth, auto dealers continued to report strong growth, and tourism activity continued at a reportedly 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 for construction and for leasing of existing commercial properties; contacts reported little change for existing home sales, which continued to be down somewhat on a year-over-year basis.
Lending volumes continued to grow slowly, and credit quality continued to improve, while contacts continued to warn of a slight rise in credit risks because of heated competition for loans. Overall, contacts reported slight increases in wages, home prices, and general price levels that were similar to those reported for the previous Beige Book period. Contacts continued to anticipate moderate growth over the next six months.
Manufacturing
Third District manufacturers have continued to report modest growth overall since the previous Beige Book, but signals were somewhat mixed. A somewhat greater percentage of firms reported increases in new orders and shipments, even as a slightly greater percentage of firms reported decreases (the share reporting no change in activity declined). Gains in activity continued to reflect demand from a broad base of sectors. Except for paper products, all sectors reported overall increases in shipments and orders. Contacts specifically mentioned ongoing demand from the auto and energy sectors. Some firms reported growing demand for home construction products; however, demand remains at a low level. Some producers of construction-related materials worried that if housing starts do not soon rise further, industry shakeouts may result in plant closings to eliminate idle capacity. Other contacts mentioned that demand from defense contracts had stabilized or was growing again from lower levels.
Over half of Third District manufacturing contacts expected business conditions to improve during the next six months. While this is a slightly lower percentage than was reported during the previous Beige Book period, this is the second consecutive period in which no firms anticipated deterioration of business conditions. Moreover, a somewhat larger percentage of firms now expect to increase employment levels over the next six months, to increase their level of capital spending, or to do both.
Retail
Since the prior Beige Book period, Third District contacts have continued to report slight growth in nonauto retail sales. Although, sales growth of back-to-school shopping items was generally described as modest. An operator of area malls reported that cooler fall-like weather has helped move fall apparel inventory, which has allowed many retailers to avoid deeper discounting, thus improving their margins. After a midsummer lull, the restaurant business picked up in August and continued growing into September. Contacts reported very strong restaurant activity in Center City Philadelphia. Overall, contacts are increasingly optimistic. While hesitant to forecast the upcoming holiday season, one contact suggested that a lot of ongoing new tenant openings may attract more shoppers. Another contact was optimistic about three significant Center City retail openings this fall.
Auto dealers continued to report strong sales growth. A Pennsylvania contact described August as one of the best months ever for auto sales at dealers throughout the state; reported sales for September were also strong but were beginning to show signs of their normal seasonal slowdown. New Jersey contacts also reported strong August sales followed by lower volumes for September, as they approach the model-year changeover and typical year-end selloff in October. 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 previous Beige Book. Volumes increased most for commercial and industrial loans and for some consumer credit lines (though not for credit cards). Reports on demand for home mortgages varied across the region from modest growth to little change; all contacts described low levels of demand for new mortgages, and negligible demand for refinancing loans. Most contacts reported little change in the commercial real estate market. Overall, banking contacts continued to report steady improvement in credit quality; several mentioned that the financials of most small business customers had improved. However, competition remains intense for creditworthy loan prospects. Some contacts also cited risky loan terms that they would not match; one described the market as "frothy."
Real Estate and Construction
Third District homebuilders have continued to report slight growth in new home construction since the previous Beige Book period. Contacts credited lower gas prices for improving sales traffic and lower interest rates for improving contract signings. Construction activity is expected to continue at modest levels, as builders are starting some homes on spec to boost their inventory of move-in-ready homes before the end of the year. Residential real estate brokers reported little change in sales this period from the prior Beige Book period. On a year-over-year basis, sales have fallen in most major markets. Brokers noted that more deals are falling through now than prior to the recession, and bankers noted that fewer people are qualifying for mortgages. These observations have been borne out by recent monthly reports from Third District multilists that have seen positive year-over-year growth of pending contracts evolve into negative growth of contracts closed one month later. Brokers also reported that the months' supply of inventory has begun to increase again. Still, brokers remain optimistic for some improvement in 2015.
Overall, nonresidential real estate contacts have reported little change since the previous Beige Book period in the pace of growth of construction and leasing activity, which remains slight. Construction activity continues to be greatest for industrial/warehouse building projects; however, some major office and residential projects have broken ground in Center City Philadelphia, and construction activity will accelerate next spring when the buildings begin to go vertical. An architecture and engineering firm reported that its business continued to exceed its plan, and it will be hiring again. Demand for the firm's services has been especially strong from energy-related sectors. Contacts also reported improved leasing activity in downtown Philadelphia and suburban Philadelphia, especially for Class A office space. Strong demand continued in Center City Philadelphia for office, residential, and retail space. In the suburban Philadelphia market, a developer noted that a "flight to quality" from older properties has driven rents higher for Class A office space and prompted ongoing renovations to upgrade older offices into Class A space.
Services
Third District service-sector firms have continued to report moderate growth in activity since the previous Beige Book. Nearly half of all firms reported increases in new orders and sales. Several contacts from banking and health-related manufacturing reported that some health-care providers had reduced personnel and expenses. These cost-cutting measures were attributed to narrower margins due to smaller reimbursements from insurance plans. The cuts occurred even though these providers have been experiencing modest demand increases as a result of previously uninsured individuals gaining access to healthcare. Staffing contacts in eastern and central Pennsylvania reported moderate increases in hiring for temporary and permanent positions. Staffing requests have come from a variety of sectors and for business expansions as well as replacements. Staffing firms remained very upbeat about prospects for this year and next. Once again, over three-fourths of all service-sector contacts reported expectations that growth trends will remain positive over the next six months; none anticipated declines.
Third District tourist areas continued to benefit from great weather conditions as the summer blended into fall. Accordingly, contacts reported modest gains overall. One retail contact reported dramatic sales increases throughout the shore areas, attributing double-digit year-over-year gains to more day-tripping even as occupancy rates of shore rentals continued to rise. (These gains, which were still strong in September, were viewed as resulting from lower gasoline prices as well as from favorable weather.) Several contacts continued to report that rebuilding from Hurricane Sandy was not complete in the hardest-hit areas, where new flood insurance and building standards have slowed reconstruction plans. In the Poconos, contacts reported favorable weather, higher occupancies, and strong bookings for the upcoming fall weekends. Contacts reported that recent casino closings in Atlantic City are expected to have a large effect on the city that should be relatively localized. Reported employment losses in Atlantic City are high; however, many of the lost jobs were part time (and many of these would have ended after the summer tourist season was over). Contacts expect that the remaining casinos may pick up some of the lost business from the recent closures; however, existing staff levels should be sufficient to service any added activity. More broadly, District 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 that is similar to that seen in other recent Beige Book periods. Less than one-third of manufacturing contacts reported an increase in their input costs; just over 10 percent reported charging higher prices for their own products. About one-fifth of service-sector contacts reported an increase in prices paid and received--a somewhat smaller share than in the prior period. Auto dealers reported little change in pricing. Several contacts continued to report tight margins. Generally, contacts reported that hiring remains cautious--occurring when necessary for replacement or for incremental growth; however, staffing firms continued to note some increased hiring for expansion. Staffing contacts also reported a few leading signs of wage pressure: A few job prospects have turned down offers, some companies are making counteroffers to retain employees, and clients are generally less rigid about salary levels.