Beige Book Report: Philadelphia
March 01, 2017
Summary of Economic Activity
Aggregate business activity in the Third District continued at a modest pace during the current Beige Book reporting period. Notable shifts in activity included manufacturing and homebuilding, which improved to a moderate pace of growth. Four sectors -- nonauto consumer spending, lending, and nonresidential construction and leasing -- were essentially unchanged, after growing at a modest pace in the prior period. Existing home sales appeared to have declined. According to most contacts, employment, wages, and prices continued to grow at a modest pace. Expectations for firm growth have risen recently; however, the anticipated pace of growth over the next six months remains moderate on average.
Employment and Wages
Employment has continued at a modest pace of growth since the prior report. Manufacturing firms continued to note increases in employment and in the length of average hours worked. Employment indicators from nonmanufacturing firms remained positive overall, but with smaller net increases as a growing percentage of firms reported a decrease in full-time and part-time workers.
Staffing firms described themselves as busy. In some cases, activity picked up immediately following the holiday lull and continued at a steady pace.
Wage pressures continued to be modest with little shift in reporting on wage levels or labor market tightness. Staffing contacts noted little change in overall wage pressures. A somewhat lower percentage of nonmanufacturing contacts reported wage increases than during the prior period.
Prices
On balance, price levels continued to rise modestly. About two-thirds of firm contacts reported no change at all in prices paid and prices received. Of the remaining firms, more reported increases than decreases with the exception of prices received by nonmanufacturing firms, which were almost evenly balanced. Contacts in banking and other large service-sector firms noted no signs, nor fear of inflation. Homebuilders continued to note the greatest price pressures for their inputs, especially for subcontracted labor. Overall, the sales prices of existing homes decreased slightly, if at all, although this varies across markets and price categories.
Looking ahead one year, manufacturers anticipate a 2.0 percent increase in prices received for their own goods and services, and nonmanufacturers expect a 2.5 percent increase. Manufacturers also reported expectations of 2.2 percent annual inflation for consumers -- slightly higher than last fall, while nonmanufacturers continue to expect 2.0 percent inflation.
Manufacturing
A greater percentage of firm contacts in a broader range of sectors reported increased manufacturing activity than in the previous period, suggesting moderate growth overall. Contacts reported that new orders picked up to a moderate pace of growth, while shipments continued at a modest pace.
Overall, gains in activity were indicated by most major sectors, including the makers of lumber products, paper products, chemicals, primary and fabricated metal products, industrial machinery, and electronic products.
More than half of the manufacturing contacts were optimistic that orders, shipments, and general activity would grow over the next six months, similar to the prior Beige Book period. About one-third of the contacts expressed expectations for increased capital expenditures, although this was a bit lower than the prior period.
Consumer Spending
Nonauto retail sales grew slightly at best during the period, according to several analysts. One area chain reported that sales were a little lower than the prior two months, and a bit below expectations but the contact was not yet worried about a changing trend.
Auto dealers noted concern this period, as sales only slightly increased over last year after adjusting for much milder weather (sales were hurt last year by a significant January 2016 snowstorm). Dealers worry about too much inventory and getting squeezed between manufacturers' ongoing supply and slightly slumping demand.
Tourism contacts generally indicated a continuation of modest growth and positive prospects for the year ahead. A Poconos contact indicated that the snow season had opened early and that there was a good base of snow for Presidents' Day, which coincides with the area's biggest winter week because so many schools have vacations. Meanwhile, area water parks continue to attract an increasing number of visitors year-round. Contacts at the Jersey Shore indicated that peak summer bookings are filling up earlier each year. Even casino revenues in Atlantic City have finally begun to register some year-over-year gains on a more consistent basis.
Nonfinancial Services
Overall, Third District service-sector firms continued to report moderate growth in general activity; moreover, the pace was somewhat faster than the prior period. Specifically, contacts noted a pickup in the moderate pace of sales and new orders. A transportation analyst reported that truck freight was growing a bit better than the prior period, as its market tightened at year-end. Spot rates for hiring trucks had increased, so contract rates will likely follow, according to the analyst. Along with steady growth, one contact noted that the incidence of consumers not paying their monthly bills continues to fall. Generally, the high expectations of future growth reported in the prior period were tempered this period -- retreating to more average levels.
Financial Services
Third District financial firms reported little or no change in overall loan volumes, after posting modest increases during the prior Beige Book period. This excludes the typically large seasonal decrease observed in credit card volumes, which follows the annual holiday season.
Consumer lending (other than for credit cards and autos) was the only loan category to grow significantly during the period. Commercial real estate loan volume grew a bit, but less so than the same period last year. Home equity loans and auto loans decreased slightly, while volumes of home mortgages and of commercial and industrial loans were mostly unchanged.
Most contacts continued to note the increased optimism of Wall Street investors and larger Main Street businesses but also noted increased uncertainty, especially for consumers and small businesses. In general, banking contacts continued to express cautious optimism for slow, steady growth.
Real Estate and Construction
On balance, homebuilders were pleased to report that the new year began with moderate increases in traffic, contract signings, and construction backlogs. Mild winter weather helped year-over-year comparisons, but activity has also outperformed firms' expectations.
Brokers in most major Third District housing markets reported a modest decline in existing home sales following moderate growth last period. They report no signs yet that the very low inventory levels will be replenished in time to boost sales this spring.
Nonresidential real estate contacts covering much of the Third District reported little change overall to the relatively high levels of construction and leasing activity. Contacts reported strong growth for projects associated with energy and pipelines and some ongoing growth for the office market in and around Philadelphia. However, contacts have begun to voice concerns as to whether the industrial/warehouse market might be near a peak, as they have previously said for multifamily construction.