Beige Book Report: Philadelphia
March 02, 2016
Aggregate business activity in the Third District appears to have grown slightly during the current Beige Book period. This is a bit weaker than the modest growth rate during the prior Beige Book period, which has been more typical of Third District expansions for several decades. Hiring appears to have continued at a modest pace according to most contacts; staffing firms reporting moderate gains and manufacturing firms reporting declines were exceptions. On balance, wage and price increases continued to rise slightly; however, home prices appeared to have leveled off after rising in prior periods. Firms generally adhered to recent expectations that growth would be modest over the next six months.
Among Third District business sectors, several sectors slowed their pace of growth or began to decline; the remainder repeated their performance of the prior period. Homebuilding and loan volumes were reported as declining slightly after growing moderately last period. General services slowed to a modest pace of growth, while staffing services slowed to a moderate pace. Auto sales appeared to be flat at very high levels after slight gains last period. General (nonauto) retail sales appeared to maintain a moderate pace of growth during this Beige Book period. Tourism contacts continued to report modest growth, as did commercial contractors and commercial leasing agents. Brokers continued to report only slight growth of existing home sales. Meanwhile, manufacturing contacts continued to report slight declines overall.
Manufacturing
Firms continued to report slight declines in overall activity during the latest Beige Book period. While shipments were somewhat positive, new orders declined further. Following consecutive reports of persistent declines in activity, firms also reported slight overall decreases in the number of employees and in the average employee workweek. Weak demand continued to be reported across most major industrial sectors, with the strong dollar and low commodity prices cited most often as factors in the declines. These relative sectoral strengths and weaknesses were reflected in comments from a transportation analyst who indicated that rail movements of crude oil had dropped off, while consumer-oriented shipping by truck remained steady.
Expectations of growth during the next six months remain positive but have weakened further since the last Beige Book, significantly so for orders and shipments. Expectations of future capital expenditures and future employment are nearly zero. The number of firms expecting declines is nearly as many as the number expecting increases.
Retail
Nonauto retail sales continued at a moderate pace of growth during the current Beige Book period. Convenience store operators reported that January, like December, had the best year-over-year gain in traffic in many years. The one significant January snowstorm generated some lost sales and added maintenance costs but was not an unusual winter event. Contacts remained bullish for 2016, noting that low gas prices continue to boost sales, in addition to a steadily improving economy.
Auto dealers throughout the Third District reported essentially no growth in auto sales, although overall sales levels remain elevated. The current Beige Book period is typically a slow season for auto sales; still dealers pointed to the loss of several sales days due to a major snowstorm. Despite the slow start, auto dealers continued to express optimism that sales volumes would remain high, if not increase, in 2016. Some contacts suggest that strong demand should continue, since the average age of vehicles on the road exceeds 11 years.
Finance
Third District financial firms reported that total loan volumes have declined slightly since the previous Beige Book after growing moderately last period. Commercial and industrial deals and commercial real estate activity continued to generate strong loan growth during the period and year over year. Auto loans grew slightly during the period, but less than has been the norm over the past several years. Mortgages and home equity loans have been flat to down over the period as well as over the year. Banking contacts continued to note a competitive lending environment and generally improving credit quality; some contacts noted a little deterioration in loan performance, prompting some tightening of standards, especially for industrial lending related to the energy sectors. Most contacts continued to report few signs of inflation and remained optimistic for continued slow, steady growth in 2016.
Real Estate and Construction
Homebuilders reported declines in contract signings for new home construction compared with their expectations for this season. Some suggested that uncertainty and stock market volatility may have contributed to the lack of activity. One builder noted difficulty finding qualified buyers for the entry-level homes that the company builds; despite rising employment levels, many people still lack sufficient cash for a down payment and adequate credit quality. Builders noted little concern about commodity costs, and as demand has slowed, labor costs have presented fewer problems. A nationwide firm described optimism for continued growth due to the upside potential from the household formation rate.
On balance, brokers in the major Third District housing markets continued to report slight year-over-year increases. Many contacts described continued low inventories and little or no increase in house prices; some contacts cited house price declines. A major Philadelphia-area broker projected a slight increase in sales for 2016 with greater potential if more homes come on the market.
Nonresidential real estate contacts continued to report modest growth in construction and leasing activity with no signs of a slowdown in any sector. Contacts reported that in addition to Center City Philadelphia, the suburban office market and the Lehigh Valley industrial market remain very strong. Rents are pushing upward in some markets. One contact noted that 2016 would be a very strong year for regularly required maintenance work on heavy industrial facilities. Contacts remained optimistic for continued growth of new construction, retrofitting, and leasing activity through 2016.
Services
Third District service-sector firms reported some slowing to a modest pace of growth during the current period. In particular, a greater percentage of firms reported declining orders and sales than in the prior period, while a smaller percentage reported additions to their full-time payroll employees. Reports from staffing firms were mixed, ranging from continued strong growth to some slowing during the period, so that on balance activity may have returned to a moderate pace of growth. One staffing agency noted an increase in their direct hires and in conversions of their temporary placements to permanent positions, indicating that this bodes well for the economy, if not their firm.
The ski season got underway fully in January, as winter and snow finally arrived. Tourism activity continued to grow at a modest pace, as occupancy rates held up in the Poconos despite a substantial increase in rooms over the past year. Atlantic City casino revenues continued to decline, dropping 4 percent compared with the prior year, or 6 percent if Internet gambling is excluded.
Expectations for continued future growth in services have fallen since the prior Beige Book period--the percent of service-sector contacts expecting growth fell to nearly one-half, while the percent of those expecting some contraction increased to nearly one-third.
Prices and Wages
On balance, general price levels have continued to rise slightly since the previous Beige Book period. Well over half of the 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, manufacturing firms tended to report decreases in prices paid and in prices received, while most nonmanufacturing contacts reported increases. Overall, contacts continued to report little upward wage pressure. Staffing firms noted some upward movement in wages--sometimes the result of pushback during salary negotiations.
Over the next four quarters, firms expect their own compensation costs per employee (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 2 percent increases in prices received for their own goods and services.