Beige Book Report: Philadelphia
April 13, 2016
Aggregate business activity in the Third District appears to have resumed a modest pace of growth during the current Beige Book period -- following slight growth during the prior Beige Book period. Modest growth is normal for Third District expansions in recent decades. Hiring appears to have continued at a modest pace, according to most contacts; staffing firms reporting moderate gains and manufacturing firms reporting slight declines were the exceptions. On balance, wages and prices continued to rise slightly; however, home prices appeared to remain essentially flat. Firms generally adhered to recent expectations that growth would be modest over the next six months.
Among Third District business sectors, several sectors rebounded from a slower growth rate (or decline) during the prior period. Brokers reported modest growth of existing home sales -- an uptick from the prior period of slight growth. Auto dealers reported modest growth following a period in which sales were flat at very high levels, and manufacturers reported modest growth following prior reports of slight declines. Homebuilding and loan volumes were reported as growing slightly after declining slightly last period. The remaining sectors repeated their performances of the prior period. Contacts from general (nonauto) retailers continued to report a moderate pace of sales growth during this Beige Book period, as did staffing services contacts. Continued modest growth was reported by contacts from general services, tourism, and commercial contractors and commercial leasing agents.
Manufacturing
Reports of overall activity rebounded sharply out of negative territory to a modest increase -- the strongest change in the growth rate in over a year. Firms reported similar improvements in shipments and new orders since the prior Beige Book period. Firms also reported that the average employee workweek increased after declining last period; however, the number of employees continued to fall slightly. Reports of increased activity were widespread. The makers of lumber, paper, chemicals, and primary metal products noted the greatest improvement from the prior period and compared with the prior year; contacts with fabricated metals and industrial machinery firms have reported improvements since last period, but not as strong as last year. Firms noted stronger demand from the housing and consumer sectors and from aerospace, while demand from the energy sector remained weak.
Overall, contacts expressed significantly higher expectations of growth during the next six months than during the last Beige Book period. This improvement was driven by a decreased percentage of firms expecting declines in shipments, orders, and general activity, following elevated levels in the prior period. Expectations of future capital expenditures and future employment also rebounded to prior higher levels.
Retail
Nonauto retail contacts continued to report moderate growth in sales during the current Beige Book period. Stronger sales continued to be noted for lower-priced necessities and convenience goods as well as some luxury goods. Convenience store operators reported that customer traffic for the current period remained very strong with no signs of slowing, nor any reduction from the slight uptick in gas prices. Contacts remained optimistic that growth would continue through 2016.
Overall, Third District auto dealers reported that growth in auto sales resumed at a modest pace after a weak start to the year. Sales were stronger in larger urban areas, but activity, including maintenance on existing vehicles, has been slacking off in smaller industrial cities, shale regions, and other rural areas. With sales continuing at high levels, dealers have begun talking about, and planning for, the likelihood that sales are reaching a plateau. However, they remain optimistic for 2016 based, in part, on continued low gas prices, fairly loose credit, and the resumption of greater manufacturers' incentives.
Finance
Third District financial firms reported that total loan volumes have risen somewhat since the previous Beige Book period. And based on revised data, loan growth was better during the prior Beige Book than we had originally estimated. Ongoing growth of commercial and industrial loans and a resumption of growth in auto lending bolstered overall volumes, while volumes of commercial real estate loans held steady. Home mortgages and home equity lines dropped in volume. A seasonal decline in credit card volumes that began in the prior period continued. The rate of decline is similar to the change observed over the same period last year; however, volumes were up moderately over the year. Banking contacts continued to note a competitive lending environment and generally improving credit quality. Generally, contacts continued to report few signs of inflation and remained optimistic for continued slow, steady growth in 2016.
Real Estate and Construction
Homebuilders have reported an improvement in traffic since last period and expect contract signings to finish slightly up for this period compared with last year. A nationwide firm reported a large increase in its backlogs, which suggests stronger construction activity for its Third District properties, given that local builders noted that mild weather helped keep their crews busy. While builders noted a few cost increases in new contracts (concrete, for example), lower energy costs have significantly lowered other input prices (such as shingles). With the relatively slow, steady pace of construction activity, builders reported no problems with labor costs or availability of labor.
Brokers in the major Third District housing markets reported an uptick to modest year-over-year sales gains; however, inventories remained low and sale prices rose little, if at all. A major Philadelphia-area broker noted some problems with mortgage approvals but expects modest growth to continue throughout the year.
Nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported ongoing modest gains in construction activity although new starts were fewer, and noted that leasing activity showed continued modest strengthening with higher rents and fewer concessions. Contractors were confident that construction activity would remain at high levels through 2018 in light of the projects currently underway and recently announced significant future projects. According to contacts, total man-hours have not eclipsed 2008 levels, but firms may be operating more efficiently since the recession.
Services
Third District service-sector firms reported little change overall in their own modest pace of activity. Contacts noted slight upticks in the pace of sales and new orders, while the pace of employment and overall activity edged slower -- but all contacts remained positive. One service firm with a broad client base throughout the national economy reported that current growth within the education sector has been slightly slower than in recent years and that consolidations have constrained growth somewhat within the health sector. Reports from staffing firms generally reflected continued moderate growth. Contacts reported being busy and exceeding their projections.
Tourism contacts remained generally positive -- with the sector continuing to grow at a modest pace, spurring investment in new attractions, new capacity, and refurbishing of older facilities. Unseasonably warm weather altered activities in the mountains and attracted more visitors to the shore. Atlantic City casino revenues rose 15 percent in February compared with the prior year -- a rare increase that may reflect stronger-than-normal convention bookings.
Expectations for future growth in services have rebounded somewhat since the prior Beige Book period -- with about 85 percent of the service-sector contacts expecting activity to grow or remain the same.
Prices and Wages
On balance, general price levels have continued to rise slightly since the previous Beige Book period. On average, about 70 percent of all contacts reported no significant change in the prices they pay nor in the prices received for their goods and services. Of the firms that indicated a change, more indicated price increases than decreases. Overall, contacts continued to report little upward wage pressure, although some firms reported raising their starting wages to attract quality workers.