Beige Book Report: Philadelphia
September 7, 2016
Aggregate business activity in the Third District grew slightly during the current Beige Book period--a bit slower than the modest pace reported last period. Similarly, overall hiring slowed to a slight pace of growth. Staffing firms reported a modest increase in activity, while manufacturers continued to report job cuts, and other sectors noted mixed trends. On balance, firms reported that prices continued to rise slightly over the current period, as did home prices. Other than health-care costs and wages for certain skilled positions, banking and staffing contacts reported that wages continued to rise modestly. Overall, firms expect moderate growth over the next six months--a little higher than they reported last period.
Third District contacts reported moderate growth for general services and lending volumes, modest growth for staffing services and tourism, and slight growth for homebuilders and commercial leasing agents. Little or no change in activity was noted by manufacturers, auto dealers, nonauto retailers, residential brokers, and commercial contractors. Most of the contacts have noted changes in the direction or pace of growth since the prior period; three sectors improved a bit, while growth in six sectors slowed, as noted in their respective sections below.
Manufacturing
Contacts reported that overall activity had changed little since the prior Beige Book period. Reports indicated that general activity fell and then rose during the period, orders rose and then fell, and shipments increased throughout. Along with these offsetting trends, firms reported that the number of employees and the average employee work hours continued to fall. The makers of paper products, fabricated metal products, and electronic equipment noted overall gains in activity from the prior period, while the makers of lumber, chemicals, and primary metals noted weaker activity. Contacts expressed higher expectations of growth over the next six months than they did during the last period. Expectations of future capital expenditures also rose; however, those for future employment did not.
Retail
Overall, nonauto retail contacts reported little change in sales during the current Beige Book period, following a slight decline during the prior period. Outlets reported that sales were flat to up slightly, although customer traffic decreased. According to convenience store operators, sales were still good, but the pace had slowed. They also noted that other food retailers had felt a slowdown that continued into the current period. Generally, contacts are more cautious than before but still expect modest growth for overall retail sales through 2016.
After edging down last period, light vehicle sales in the Third District held steady this period at high levels. While sales have been swinging between periods of growth and decline, dealers expect total 2016 sales to be slightly above the 2015 level. They also noted tighter profit margins, as sales flattened out, but expenses continued to rise. Since the average age of vehicles on the road remains high, dealers believe pent-up demand will be strong for sales beyond 2016; however, they noted that used car prices may begin to fall and supplant demand for new cars.
Finance
Third District financial firms continued to report moderate growth of total loan volumes over the Beige Book period. Volumes within all lending categories have grown since the prior period except for home equity loans and commercial and industrial (C&I) loans, which tailed off in August. All categories except C&I loans and automobile loans grew at a faster pace than during the same period one year ago. The strongest growth during the current Beige Book period was for credit card debt, commercial real estate, automobile loans, and other consumer lending. Mortgage lending was up slightly during the period, while home equity loans were down slightly; both have declined since last year.
On balance, banking contacts continued to describe their loan portfolios as healthy and their customers' financials as improving. Most contacts state they have left their loan standards unchanged for most loan categories, and few expressed concerns about riskier loans by their competitors. Many continued to characterize the lending environment as competitive. Most bankers described the confidence of their business and consumer customers as low; some said that confidence was steady, if not rising, but that customers remained cautious of borrowing and investing. Bankers remained cautiously optimistic that slow, steady growth would continue.
Real Estate and Construction
Homebuilders reported that activity continued to rise slightly, although prospective traffic slowed more than expected for the late summer season. Builders noted few cost pressures, other than for some subcontractors with skilled labor positions; material costs pressures remained subdued.
Brokers in the major Third District housing markets noted that existing home sales activity had leveled off since the prior period. A major Philadelphia-area broker as well as bankers throughout the Third District noted that sales continued to be weak because of the lack of inventory for mid-priced housing and a lack of demand for high-priced homes. Overall, home prices are still rising slightly, although this varies across markets and price categories.
Nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported that construction activity remained steady at healthy levels, while leasing activity was flat to up slightly. In what was described as a lull, not a retreat, contacts reported that activity in both segments was growing at a somewhat softer pace compared with last period's modest growth. Contacts noted that more projects are in the pipeline for future groundbreaking, which should keep the level of new construction relatively high. One firm noted that new warehouse developments have spread from e-commerce projects to now include expansions for local manufacturers. In the office market, a firm described a critical mass of deals from a variety of sectors, including health and finance, which are creating demand beyond Center City Philadelphia to include the inner-ring transit suburbs.
Services
Third District service-sector firms reported a moderate pace of growth--somewhat better than the prior Beige Book report. Contacts noted similar improvements in the pace of sales and new orders. Two large national service-sector firms noted continued growth overall, a positive outlook, and little concern for cost pressures, including wage pressures. One firm specifically noted that its customer payment default rates in this region had improved, suggesting generally healthy household finances. A transportation services analyst noted some uptick in activity, but that the underlying numbers remain soft.
Tourism contacts expressed mixed results for a continuation of modest growth overall. Philadelphia convention bookings have been especially strong all summer and into September. Tourist activity in the mountains and at the shore was described as somewhat softer than expected; however, last year was exceptionally good and the weather less oppressively hot. Atlantic City casino revenues showed little sign of strengthening, and another casino will close after Labor Day.
Employment indicators were mixed, as many contacts noted using fewer full-time hires, greater part-time hires, and a longer workweek since the prior period. Staffing firms reported modest growth--a slower pace since last period--and expressed greater caution. Expectations for future growth in services have improved somewhat since the prior Beige Book period, with a higher percentage of service-sector contacts expecting activity to grow over the next six months.
Prices and Wages
On balance, price levels have continued to rise slightly since the previous Beige Book period. Over half of all contacts reported no significant changes in the prices they paid or received for their goods and services--similar to last period. Of the firms that indicated a change, more noted increases than decreases. Separately, bankers noted no signs of excess inflation, except in health care. Over the next year, manufacturers anticipate a 1 percent increase in prices received for their own goods and services; nonmanufacturers expect a 2.5 percent increase. Manufacturers also reported expectations of 2 percent annual inflation for consumers, while nonmanufacturers expect 2.5 percent inflation.
Banking and staffing contacts cited little change in relatively modest wage pressures for their firms and for their business clients, other than for certain skilled positions. They did note pressure on employee benefits from rising health-care costs. Over the next year, most firms expect their own compensation costs per employee (wages plus benefits) to rise 3 percent.