Beige Book Report: Philadelphia
December 2, 2015
Aggregate business activity in the Third District continued to grow at a modest pace during the current Beige Book period. Firms hired additional employees at a similarly modest pace; most of the hiring was reported from staffing firms and service sectors. On balance, only slight increases were reported in wages and prices, including home prices. Moderate growth of economic activity is anticipated over the next six months.
Across sectors, activity at staffing firms continued to grow at a strong pace during the current period, and the growth of auto sales, general services, and contracts for new homes accelerated from the prior period to a moderate pace of growth. Lenders also continued to report moderate growth of loan volumes. General retailers reported that sales slowed to a more modest pace. Commercial contractors and commercial leasing agents continued to report modest growth, while existing home sales slowed somewhat from its prior modest growth. Tourism contacts continued to report modest growth and manufacturing contacts reported declines overall.
Manufacturing
Contacts indicated that general activity declined slightly during the latest Beige Book period. Moreover, a greater percentage of firms reported declines in new orders and shipments than reported increases. Over the period, firms reported little overall change in employment numbers, but decreases in the average employee workweek. Activity appeared to be down to flat for most major industrial sectors, with firms continuing to cite the strong dollar, low commodity prices, and weak global demand for their products. That said individual firms within sectors sometimes reported increasing demand. Growth in activity was most often found among firms producing goods for the consumer, the housing market, or select markets, such as, natural gas transmission pipeline projects.
Expectations of growth during the next six months have remained about the same since the last Beige Book report, as have firms' plans for future capital expenditures. However, the percentage of firms that expect to increase employment has risen and the percentage expecting to reduce employment has fallen.
Retail
Nonauto retail sales slowed to a modest pace in the current Beige Book period. Area malls reported slight growth overall, including the apparel category which accounts for about half of all sales; surprisingly, restaurant sales at mall properties declined significantly. An outlets operator reported moderate sales growth, which is slower than the norm for their value-oriented stores. Mall and outlet contacts were hopeful that winter apparel sales would rebound now that cold weather has arrived. Convenience store owners continued to report strong growth of traffic and sales. Most contacts remained optimistic for ongoing growth through 2016 including convenience store operators; however, the latter does not expect to repeat their record-setting 2015 growth rates, which benefited from lower gas prices and a long run of warm, sunny weekend weather.
On average, auto dealers reported moderate growth in auto sales--a pick-up in pace from the prior period. Reports of growth were much stronger in New Jersey than in Pennsylvania. Following two months of strong sales growth, New Jersey dealers reported that November started very slowly. They expect Black Friday sales will help but that some sales may be delayed, adding to the typically strong December sales. Pennsylvania dealers reported that sales were strong in larger urban areas and weaker elsewhere. Overall, auto dealers remained optimistic for continued growth through 2016.
Finance
Third District financial firms continued to report moderate overall increases in total loan volumes since the previous Beige Book. Commercial and industrial deals and commercial real estate activity continued to generate the strongest loan growth. Auto loans and home equity lines grew moderately, as did credit card balances. Other consumer lending grew slightly, while mortgage lending appeared to fall slightly. Most contacts attributed loan growth to a steadily improving economy, though several noted that households and small businesses remained cautious of taking on more debt. Banking contacts continued to report improving loan quality and a competitive lending environment. Few signs of inflation were noted. Contacts remained optimistic for continued growth over the next six months.
Real Estate and Construction
Homebuilding activity throughout the Third District picked up to a moderate rate of growth since the last Beige Book according to contacts. A central Pennsylvania builder reported that activity had begun slowly in the period but quickened in the latter half. A New Jersey builder reported that, by mid-month, November was already the best month of the year for contract signings, providing a solid backlog for the winter season. A nationwide firm reported strong increases in contract signings for its markets covering the Third District states. Builders continued to note difficulties managing labor costs as subcontractors remained cautious about expanding to meet demand.
Brokers in the major Third District housing markets reported mixed results with year-over-year declines noted in the larger Philadelphia and Lehigh Valley markets compared with gains in the smaller Harrisburg and Jersey Shore markets. The year-over-year comparisons are weaker for the large markets because their sales began to improve earlier in the latter half of 2014. A major broker from the Philadelphia market described a "slow growth market" in which inventories are stable at low levels. Prices increases remain constrained.
Nonresidential real estate contacts reported little change to the modest pace of growth in construction and leasing activity seen earlier. Contacts representing architects, engineers, and contractors reported continued growth in demand for services and greater profitability on projects won. Little to no inflation was reported in construction costs. Generally, brokers described rents rising and concessions falling for office space as service sector activity picks up. One contact reported that industrial rents were near all-time highs as supply has not kept pace with demand. Contacts remained optimistic for ongoing growth of both new construction and leasing activity throughout the District into 2016.
Services
Third District service-sector firms reported a moderate pace of growth--a slight improvement from the prior period. On balance, firms reported additions of full-time and part-time payroll employees, plus increases in hours worked. Staffing firms throughout the Third District continued to report strong growth for temporary positions and permanent placements across a broad range of manufacturing and service sectors. Temp positions have also included long-term temporary placements. Tourism activity continued to grow at a modest pace from mountains to shore through the fall. Contacts continued to cite weather worthy of Camelot for attracting extra weekend visitors. Contacts offered retrospective reports that the strong summer season had generated growth in bank accounts and investment in new and expanded businesses. The remaining Atlantic City casinos are healthier, as well, although overall revenues have continued to fall. Overall, expectations for future growth in services remained strong, with nearly two-thirds of all service-sector contacts expecting growth.
Prices and Wages
On balance, general price levels have continued to rise slightly since the previous Beige Book period. Roughly two-thirds of all contacts reported no significant change in the prices they pay for inputs and the prices received for their goods and services. Of firms that indicated a change, most nonmanufacturing contacts reported increases of prices paid and prices received, although retail contacts reported little pressure to raise prices. Firms from the smaller manufacturing sector tended to report a slight decrease in prices paid and little change in prices received.
Overall, contacts continued to report only slight upward wage pressures, although some contacts continued to report difficulties filling highly technical positions. One staffing contact indicated a little upward wage pressure, noting that several client firms had set higher wage rates, which allowed his firm to be more competitive in its search for qualified workers. In addition, he noted that more prospective employees have begun trying to negotiate higher offers.
Over the next four quarters, firms expect their own per employee compensation costs (wages plus benefits) to rise 3 percent, the median forecast from a broad-based survey of Third District firms. Firms also reported expectations of 2 percent annual inflation for consumers and 1 percent increases in prices received for their firm's own goods and services.