Beige Book Report: Philadelphia
January 13, 2016
Aggregate business activity in the Third District continued to grow at a modest pace during the current Beige Book period. Overall, firms hired additional employees at a similarly slow, cautious pace; however, service-sector contacts, especially from staffing firms, reported stronger hiring rates. On balance, only slight increases were reported in wages and prices, including home prices. Firms tended to report less ambitious growth expectations than in prior periods--generally stating that the current [modest] trends would continue.
Among Third District business sectors, general (nonauto) retail sales appeared to accelerate a bit from the prior period to a moderate pace of growth through the holiday shopping season. Homebuilders also sustained a moderate growth rate with decent contract signings and atypically strong construction activity this late in the season, although the overall level of activity remains low. Contacts across the broad service sector and the region's lenders continued to report moderate growth of sales and loan volumes, respectively; staffing firms reported somewhat stronger growth. Tourism contacts continued to report modest growth, as did commercial contractors and commercial leasing agents. Auto dealers reported that sales slowed to a slight pace of growth, but volumes remained at very high levels. Brokers continued to report only slight growth of existing home sales. Meanwhile, manufacturing contacts continued to report slight declines overall.
Manufacturing
Overall activity continued to decline slightly during the latest Beige Book period. New orders also declined further; however, shipments appeared to rebound a bit. Despite the general declines, firms reported slight overall increases in the number of employees and in the average employee workweek. Although the year end is typically slow for most industrial firms, activity appeared to be weak for most major industrial sectors even after adjusting for seasonal factors. Weak global demand coupled with the strong dollar are generally cited as major contributors to the current declines; some firms also continued to cite weak demand from customers that supply Pennsylvania's energy extraction sector.
Expectations of growth during the next six months have remained positive but have significantly weakened since the last Beige Book report, as have firms' plans for future capital expenditures and future employment. Substantial layoffs were recently announced for Delaware's pharmaceutical industry in advance of a proposed merger of two large firms and its subsequent spin-off into three smaller entities.
Retail
Nonauto retail sales improved to an average pace of growth in the current Beige Book period. Area malls reported moderate sales growth overall with the strongest activity on "Super Saturday" (December 19); some malls noted that traffic over the Super Saturday weekend rivaled Black Friday and its weekend. An outlets operator reported even stronger preliminary sales growth over the period including Thanksgiving and Christmas and noted that traffic was greater still on the weekend after Christmas. Convenience stores operators reported a "great December" with the best year-over-year growth in traffic for any month since 2011. Contacts generally cited an improving economy but also acknowledged unseasonably warm weather for increasing traffic; convenience stores also noted that traffic from construction crews is "gangbusters." Overall, contacts expect steady growth to continue in 2016.
On average, auto dealers reported slight growth in auto sales, which continued at very high levels--the sales pace appeared to have picked up somewhat in Pennsylvania but may have edged back in New Jersey compared with the prior Beige Book period. Generally, auto dealers continued to express optimism that sales volumes would remain high in 2016, although continued growth may be modest at best.
Finance
Third District financial firms have continued to report moderate overall increases in total loan volumes since the previous Beige Book. Auto loans exhibited the greatest percentage gains during the period, while commercial and industrial (C&I) deals and commercial real estate activity continued to generate strong loan growth. Auto loans and C&I loans have been the strongest categories over the year as well. Abstracting from normal seasonal surges, credit card volumes rose modestly. Mortgages, home equity loans, and other consumer loans have been flat to down over the period as well as over the year. Banking contacts continued to note a competitive lending environment, a greater demand for new mortgages than for refinances, and improving credit quality. Most continued to report few signs of inflation. Contacts remained optimistic for continued slow, steady growth in 2016.
Real Estate and Construction
Homebuilders have appeared to sustain a moderate growth rate since the last Beige Book. A nationwide firm reported strong increases in contract signings for its markets covering Third District states. Reports from smaller builders were mixed. Two Pennsylvania builders reported that contract signings were relatively busy over the period; a New Jersey builder noted that contract signings fizzled toward the end, as more than usual signings fell through after securing deposits. Moreover, most builders reported that large backlogs and unseasonably warm weather had kept construction crews more active than usual. Builders did note that the time required to deliver a new house has lengthened, as labor shortages continued to hamper their ability to secure subcontracting services on a timely basis.
Most brokers in the major Third District housing markets continued to report small year-over-year increases; however, the Lehigh Valley market showed a slight decline. Overall, house prices continued to rise slightly. A major Philadelphia-area broker has cited stagnant inventory levels since 2012 that many agents suggest have created a competitive seller's market. Agents also noted a significant shift in locational preferences from rural areas to Philadelphia's Center City.
Nonresidential real estate contacts continued to report modest growth in construction and leasing activity. Contacts representing architects, engineers, and developers continued to report the strongest activity in Center City Philadelphia and other smaller urban cores. Contacts attributed some of the increasing demand to employers choosing to relocate jobs to the urban cores to attract younger workers. One contact noted that pent-up demand for prime Center City office space has pushed rents up to levels not seen since 2007. One contact noted that multifamily residential construction is heating up in some suburban areas, as well as in downtowns--often as part of mixed-use properties. Contacts remained optimistic for continued growth of both new construction and leasing activity through 2016.
Services
Third District service-sector firms continued to report a moderate pace of growth during the current period. On balance, firms reported modest additions of full-time payroll employees plus increases in hours worked. Staffing firms throughout the Third District reported steady, strong growth for temporary positions and permanent placements across a broad range of manufacturing and service sectors. In contrast to a more typical seasonal lull, one firm noted receiving new orders right through the holidays for a second consecutive year. Tourism activity continued to grow at a modest pace, although the unseasonably warm weather encouraged tourists to favor the shore over the mountains. Ski resorts struggled through the Christmas week with little or no snow--relying on other activities to keep visitors busy. Demand for last-minute reservations was soft. Atlantic City casino revenues were essentially flat in November compared with the prior year, despite being aided by better weather this year and an extra weekend day. Overall, expectations for continuing future growth in services remained widespread, with nearly two-thirds of all service-sector contacts expecting some growth.
Prices and Wages
On balance, general price levels have continued to rise slightly since the previous Beige Book period. Over half 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 in prices paid and prices received. Firms from the smaller manufacturing sector tended to report decreases in prices paid and in prices received. Overall, contacts continued to report only slight upward wage pressures, although many contacts continued to report difficulties filling various technical positions. Manufacturing firms expected essentially no change in the cost of their nonlabor production inputs for 2016; however, they expected their direct wage costs to increase in excess of 2 percent, with benefit increases higher still.