June 1, 2016
Aggregate business activity in the Third District continued at a modest pace of growth during the current Beige Book period. Most contacts continued to report a modest pace of hiring with some exceptions; staffing firms remained more bullish--noting moderate hiring trends, while manufacturing firms continued to report declines. On balance, prices continued to rise slightly, although home prices appeared to remain essentially flat. However, contacts are mentioning modest wage pressures somewhat more frequently than in the last report. Overall, firms continued to expect modest growth over the next six months.
Four sectors of the Third District reported changes in the direction or pace of their growth since the prior period. Lenders reported improving from a modest to a moderate pace of growth in loan volume. In contrast, according to contacts, nonauto retail sales slowed a bit to a modest pace, while auto sales and manufacturing activity appear to have fallen after growing modestly last period. The remaining sectors indicated no change to their prior performances, which ranged from slight growth for homebuilders to moderate growth for staffing services. Contacts from general services, transportation services, tourism, commercial contractors, commercial leasing agents, and real estate brokers continued to report modest growth.
Manufacturing
Reports of overall activity fell into slightly negative territory, since the prior Beige Book period, as did reports of shipments and new orders. Firms also reported that the number of employees continued to fall slightly and the average employee workweek fell sharply after rising somewhat during the last period. The makers of chemicals, electronics, and primary metal products appeared to contribute to the overall decline in activity. The makers of lumber, instruments, industrial machinery, and fabricated metal products noted the greatest improvement from the prior period and compared with the prior year; contacts with paper products firms have reported improvements since last period, but not as strong as last year. Firms continued to note stronger demand from the housing and consumer sectors, while demand from the energy sector remained weak. Overall, contacts expressed somewhat higher expectations of growth during the next six months than during the last Beige Book period. This improvement was driven by slightly increased percentages of firms expecting increases in shipments, new orders, and general activity than during the prior period. Expectations of future capital expenditures and future employment also rose.
Retail
Nonauto retail contacts have reported modest growth in sales during the current Beige Book period--a slightly slower pace than the prior period. At mall stores, negative year-over-year comparisons for apparel sales at every price point were said to have been partially offset by continued strong growth in other categories, including restaurants. Convenience store operators also noted some slowing of sales and traffic but were uncertain as to the extent of the negative contribution from relatively colder, rainier weather and slightly higher gas prices. Contacts remained hopeful that modest growth would continue through 2016.
Overall, Third District auto dealers reported that light vehicle sales have slowed somewhat during the current period. Some dealers suggested that early May sales appeared to be coming back; others expressed concerns that sales have begun to slow from recent peaks. Dealers mentioned that lack of inventory, aggravated by high recall levels, has constrained supply; that record numbers of lease vehicles coming back to the used car market has lowered demand for new car sales. Dealers hope that total 2016 sales may still eclipse 2015, in part, due to greater use of manufacturers' incentives.
Finance
Third District financial firms reported that total loan volumes have risen substantially since the previous Beige Book period. All lending categories have been positive since the prior period except for consumer loans (excluding credit cards and auto loans). However, volumes of mortgages and home equity loans were below year-ago levels. The strongest lending categories continued to include commercial and industrial loans and auto lending, while the volume of commercial real estate loans resumed strong growth. A strong rise in credit card volumes during the reporting period is mostly seasonal in nature--a year-over-year comparison shows modest to moderate growth.
Banking contacts continued to worry about a lending environment that has led some of their competitors to take on riskier loans. Meanwhile, credit quality continued to improve for consumers and is generally positive for most commercial borrowers. While contacts signaled some rising wage pressures, most continued to report few signs of general price inflation and remained optimistic for continued slow, steady growth through year-end.
Real Estate and Construction
Homebuilders have reported that economic activity rose at the same slight pace as during the previous period and that their outlook for the year continued to be for more of the same. Some New Jersey builders may experience a brief lull in construction activity as plans are redesigned to accommodate new building codes. Builders noted few cost increases except for some manufactured inputs, such as concrete. One builder noted that the company's subcontractors have finally begun to expand capacity but have difficulty finding skilled labor.
Brokers in the major Third District housing markets reported continued modest year-over-year sales growth. A major Philadelphia-area broker expected ongoing modest growth but noted that low inventories remained a constraint, especially for moderately priced homes. Overall, home prices remained mixed--rising and falling across markets and price categories.
Nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported little change in the ongoing modest gains in construction activity and in leasing activity. A developer noted that office projects have been in greater demand for over a year, while industrial/warehouse buildings have remained strong for many years. One contact indicated that existing tenants have been opting to expand at an increased rate; another noted that demand for relocation to downtown space has grown from outside firms.
Services
Third District service-sector firms reported no significant change in their own modest pace of activity. Contacts noted small net overall gains in the pace of sales and new orders with the gains occurring in the latter half of the period. The pace of employment also improved. One large national service-sector firm described the economy as "disappointingly stable." Other contacts tended to agree with the general sentiment; however, some took more of a glass-half-full perspective. An industry analyst relayed reports of a softer market for truck freight, although numerous factors obscure the contribution from the underlying economic growth. Reports from staffing firms reflected continued moderate growth, faster decision-making by firms, and more competition. Tourism contacts generally indicated modest growth--one shore contact indicated strong traffic despite colder wetter weather compared with last year. Atlantic City casino revenues rose slightly compared with the prior year--marking two consecutive periods of gains. Expectations for future growth in services remained about the same as the prior Beige Book period--with over 90 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. About 65 percent of all contacts reported no significant change in the prices they pay nor in the prices received for their goods and services--a somewhat lower percentage than last period. Of the firms that indicated a change, more indicated price increases than decreases except for prices received by nonmanufacturers, who tended to report declines. Overall, contacts are beginning to report more signs of modest wage pressure--some firms have experienced greater turnover or raised their own starting wages, while staffing contacts reported shifting their rate structure upward and receiving more push-back from recruits on salary offers.
Over the next four quarters, nonmanufacturing firms expect their own compensation costs per employee (wages plus benefits) to rise 2.5 percent; manufacturing firms expect a 3.0 percent increase. Firms also reported expectations of 2 percent annual inflation for consumers and 2 percent increases in prices received for their own goods and services.