Beige Book Report: Philadelphia
March 4, 2015
Aggregate business activity in the Third District continued to grow at a modest pace during this current Beige Book period. Most of the observed differences in growth stem from year-over-year comparisons with the early 2014 months that were battered by severe winter weather. This was especially true for tourism, new home construction, and existing home sales; all three sectors benefited from a somewhat milder winter this year. In contrast, manufacturers reported only slight 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, as did transportation services. Nonauto retailers continued to report modest growth, while tourism appeared to have regained a strong level of activity similar to last year as snow settled on ski resorts. Residential builders responded with mixed reports that offered some optimism for a better 2015. Overall, brokers noted some slight improvement in activity. 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, increasing numbers of contacts expressed concern about weak 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 continued to grow during the latest Beige Book period but only at a slight pace. Nearly as many firms indicated declines in activity as increases. New orders and shipments also grew more slowly; the percentage of firms reporting decreases in new orders and shipments rose further compared with the last period. Gains in activity appeared to be stronger among makers of industrial machinery, electronic equipment, and paper products; activity appeared weaker among makers of primary and fabricated metal products. Overall, most firms reported that declining energy prices were having a positive impact on their own production costs and on potential demand via consumer channels; however, some firms reported weaker demand or a weaker outlook for demand from customers serving energy production sectors.
Expectations of growth during the next six months remained positive but slipped from historically high levels to levels that are more typical of an expansionary period. The percentage of firms anticipating positive growth dropped to less than 50 percent for the first time in more than a year. Despite that shift, firms reported little change in expectations of future employment and capital expenditures, with about one-third anticipating increases and about one-tenth anticipating decreases.
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 growth finished solidly for the holiday season and that their retailers were indicating good activity through January and into February. Restaurants experienced a renewed growth of customers during the fourth quarter of 2014 and attributed part of the demand as a reaction to falling gasoline prices. "Consumers had a great month" during the holiday season, according to an outlet mall operator, further bolstering reports that stores moved the most goods via heavy promotions. Contacts remain cautiously optimistic for 2015; however, margins remain tight for retailers, and most shoppers remain focused on low prices.
Auto dealers continued to report moderate growth in sales year over year. A Pennsylvania contact described sales levels throughout the state as being strong overall through mid-February despite the typically softer seasonal levels. New Jersey contacts reported strong statewide sales for January; however, weather was taking a toll on early February sales. Auto dealers expect growth to continue in 2015 as it had in 2014.
Finance
Third District financial firms continued to report modest increases in total loan volume since the previous Beige Book. Volumes decreased seasonally for credit card lines as consumers pay down for several weeks following their holiday spending. Strong growth was reported for other consumer credit lines, including auto loans, and for commercial real estate loans. Moderate growth was reported for commercial and industrial lending, while modest growth was reported for home mortgages. Only slight growth was reported for home equity lines of credit. Increasing numbers of contacts expressed concerns that competition has lowered lending standards, undercut margins, and is beginning to lower overall credit quality. Many indicated that they saw no signs of inflationary pressures. Banking contacts tended to be most positive about economic prospects in central Pennsylvania, the Lehigh Valley area, and the Philadelphia market. Nearly all contacts have grown more optimistic about growth prospects for 2015.
Real Estate and Construction
Third District homebuilders provided mixed reports. A New Jersey builder was encouraged by good levels of new contract signings in January and February on the heels of a strong end-of-year close. One central Pennsylvania builder was close to budget in January but reported a slowdown in February. Generally, builders reported that housing starts have slowed with the cold and snow. Also, builders reported that regular price increases of construction materials leaves little room within their own tight margins for addressing wage pressures from their subcontractors. Builders anticipate a better year in 2015. Brokers reported that existing home sales were greater in December and January on a year-over-year basis; sales growth was the greatest in central Pennsylvania, while sales were essentially unchanged along the Jersey shore. Contacts noted that the positive comparisons are made with a 2013 sales season pounded by winter storms. Contacts continued to report slight overall increases in home prices, except in the city of Philadelphia where sales and prices are rising faster. 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. New construction continued to be dominated by industrial/warehouse projects, urban apartment dwellings, and public infrastructure, including sand reclamation projects along the Jersey shore. Contacts reported that continuing incremental improvements in leasing activity in downtown and suburban Philadelphia is leading to some upward push on rents, especially for Class A or better office space. Center City residential and retail markets also continued to be active, as well as several select suburban office markets. Contacts remained optimistic for the ongoing 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. About half of all firms reported increases in new orders and sales. A transportation services analyst reported that the absolute volume of traffic was approaching levels last attained during the prior expansion, which means greater highway congestion. The record volume has occurred even as trucking capacity was freeing up due to recent investments in new trucks, new drivers, and a temporary lull from regulatory constraints. The analyst also roughly estimated that the lower diesel fuel costs generated a 1 percent savings on the cost of goods shipped. Staffing contacts throughout the Third District reported positive employment trends across a broad spectrum of economic sectors. Companies reportedly kept busy at year-end with less of the typical slump in the demand for temps. Firms reported that direct hires have picked up, that the majority of hires are due to economic growth rather than replacement, and that temp placements are stronger still when compared with last year, when winter storms closed businesses for several days at a time. Staffing firms remained very positive for growth prospects in 2015. Staffing contacts described tight margins and little change in wage pressures. Among all service-sector contacts, more than three-fourths reported expectations that growth trends for their firms will remain positive over the next six months; none anticipated declines.
Third District tourist areas reported improving conditions as the winter has worn on. Despite early season snow, the ski season had a slow start. However, contacts report that activity is now about even with last year, which was a very good season. Contacts remain concerned about the long-term impacts of the Atlantic City casino closings on the local economy and especially on the city's fiscal health. Surprisingly, casino revenues posted a rare positive year-over-year increase in January; however, it was mostly due to very weak numbers during the severe winter weather last 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 reported little change in the prices they pay and the prices received for their products since the prior period. The percentage of firms reporting increases fell nearly to the same percentage of firms reporting decreases. Among nonmanufacturing firms, a somewhat lower percentage of contacts reported increases of prices paid and prices received since the prior period, and a slightly greater percentage have reported decreases; overall price pressures have lessened. 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.