Beige Book Report: Philadelphia
January 14, 2015
Aggregate business activity in the Third District continued to grow at a modest pace during this current Beige Book period, with very few changes in the growth rates of specific sectors. Manufacturers reported modest growth after a somewhat faster pace during the previous period. Auto dealers, staffing firms, and other general service-sector firms continued to report a moderate pace of growth. Nonauto retailers continued to report modest growth, while tourism activity appears to have slowed, with mixed reports coming from contacts at different destinations. Residential builders continued to report a slight decline in contract sales of new homes. Overall, brokers noted little change in existing home sales (sales of existing homes had risen slightly during the prior period). The commercial real estate sectors continued to report modest growth for construction and for leasing of existing commercial properties.
Lending volumes continued to grow at a modest pace, and credit quality continued to improve; however, more contacts expressed concern about loosening underwriting standards. As in the previous Beige Book, contacts reported slight increases in wages, home prices, and general price levels. Contacts continued to anticipate moderate growth of economic activity over the next six months.
Manufacturing
Third District manufacturers reported that current activity resumed growing at a modest pace after rising more briskly during the previous Beige Book period. Reports of new orders and shipments also suggested continued growth, but with less vigor. About twice as many firms reported decreases in new orders and shipments compared with last period. Gains in activity appeared to be stronger among makers of primary metals, chemicals, and paper products; activity appeared weaker among makers of lumber and wood, rubber, and plastic products. Contacts continued to report that stronger demand emanated from the automotive and commercial aviation sectors.
Expectations of positive growth during the next six months remained at historically elevated levels and were broad-based. Nearly two-thirds of the Third District manufacturing contacts reported positive expectations for growth. Overall, about one-third of the firms' contacts also continued to report that they expect to increase employment levels and capital expenditures. Only 10 percent or fewer of manufacturing contacts expected a decrease in employment, capital expenditures, or general activity.
Retail
Third District contacts have continued to report modest growth in nonauto retail sales since the prior Beige Book period. An operator of area malls reported that sales were better in 2014 than they were in 2013, but they were not spectacular. Higher-end merchandise continued to sell strongly, as it has for much of the recovery. Although contacts anticipate that retail sales will improve in 2015, one contact cautioned that more retail bankruptcies may occur in early 2015 due to shifting trends in tastes.
Auto dealers continued to report moderate growth in sales year over year. A Pennsylvania contact described sales levels throughout the state as strong overall through two-thirds of December despite the typical seasonal slowdown. Statewide sales in New Jersey were steady between October and November; however, the year-over-year change was flat in October and up 8 percent in November. Auto dealers remain bullish for 2015, and low oil prices are shifting purchases from cars to trucks.
Finance
Third District financial firms have continued to report modest increases in total loan volume since the previous Beige Book. Volumes increased rapidly for credit card lines in a typical seasonal shift. Moderate growth was reported for commercial and industrial lending, while modest growth was reported in several loan segments, including commercial real estate and some consumer credit lines, such as auto loans. Only slight growth was reported for mortgages and home equity lines of credit. Most contacts reported continued improvements in their customers' credit quality and in their own loan portfolios. However, most contacts also warned that underwriting standards have loosened. A mortgage servicing contact expressed concern about loan performance in 2015 and 2016 even as the rate of mortgage delinquencies appear to be bottoming out in most states. New Jersey and Pennsylvania remain exceptions with persistently high rates of severely distressed mortgages. Contacts remained optimistic about growth prospects for the nation's economy and are especially bullish about the potential impact of low-cost natural gas on Pennsylvania's industrial prospects.
Real Estate and Construction
Overall, Third District homebuilders continued to report weak traffic and declining numbers of contract signings. One builder reported more potential buyers and was more optimistic for December than he was in the prior two months. Builders reported ongoing price pressures from contractors for their labor costs and continued difficulty attracting first-time homebuyers out of the rental market. Builders expect that 2015 will be a better year than 2014, but they expressed a range of opinions on whether household formations will return to the prerecession rate or settle into a new, lower normal trend. Brokers reported that existing home sales finished lower in November on a year-over-year basis; however, a broker compiling data on a 10-county Philadelphia region reported that pending sales were up in double digits through mid-December. Contacts continued to report slight overall increases in home prices. Brokers are generally more optimistic for a return to growth in 2015.
Construction and leasing continued at a modest pace, according to nonresidential real estate contacts. Demand continued for new industrial/warehouse projects and for projects in Center City Philadelphia and some outlying suburbs. Contacts from architecture and engineering firms reported a significant increase in bids emerging for new projects, while competition from other firms has begun to abate. The falling competition was attributed to increased demand that has begun to stretch the capacity of some firms. Contacts continued to report incremental improvements in leasing activity in downtown and suburban Philadelphia, especially for office, residential, and retail spaces in Center City and select suburban office markets. The office space demand primarily represents a shift in the desired type of office space, rather than growth of office employment. Still, contacts are optimistic for continued growth of both new construction and leasing activity in 2015.
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. Two large national firms reported ongoing growth that was meeting expectations for the fourth quarter despite some headwinds from shifting consumer trends. Staffing contacts in eastern and central Pennsylvania continued to report moderate increases in hiring for both temporary and permanent positions. Staffing requests continued to flow in on the Monday before Christmas. Christmas week is typically slower, as staffing orders slump to their seasonal low during the week of New Year's. Staffing firms remained very positive for growth prospects in 2015. Overall, about three-fourths of all service-sector contacts reported expectations that growth trends for their firms will remain positive over the next six months; none anticipated declines.
Third District tourist areas reported mixed conditions for the early winter months. Several larger ski resorts have established a two-foot base of snow after a pre-Thanksgiving snowstorm staked them to an early season. However, unseasonably warm weather caused all the resorts to struggle to maintain good snow conditions and to attract winter tourists. The warmer weather and special events have kept the shore destinations reasonably busy during their off-season. However, many contacts remain concerned about the long-term impacts of casino closings in Atlantic City. Casino revenues were down about 10 percent in November year over year.
Prices and Wages
Overall, Third District contacts reported little change to the steady, slight pace of price level increases that was seen in other recent Beige Book periods. Manufacturing contacts have reported little change in their prices paid and prices received since the prior period, with about two to three times more firms expecting increases versus decreases. Among nonmanufacturing firms, contacts have reported fewer increases and more decreases of prices paid and prices received since the prior period, with little net difference. Manufacturers and construction firms continued to note wage pressures to attract skilled workers. Other contacts, including those from staffing firms, continued to note little significant change in wage pressures. Most contacts expect lower energy prices to broadly boost consumer spending, with more upside potential in Pennsylvania than downside risk to the state's energy-producing sectors.