Beige Book Report: Philadelphia
May 31, 2017
Summary of Economic Activity
Aggregate business activity in the Third District continued at a modest pace during the current Beige Book reporting period. Manufacturing and homebuilding continued at a moderate pace of growth, but nonfinancial services appear to have slowed to a modest pace. Nonresidential construction and existing homes sales picked up a bit, which is echoed by changes in loan volumes to those sectors. On balance, employment, wages, and prices continued to grow at a modest pace; however, tight labor markets are reported in some regions and for some occupations. Contacts noted that some wage pressures have eased as firms substitute technology for labor. Overall, firms continued to expect moderate growth over the next six months.
Employment and Wages
Employment has continued at a modest pace of growth. Manufacturing firms reported increases in employment and in the average hours worked compared to the prior period. Employment indicators from nonmanufacturing firms were mixed, as contacts noted fewer net additions to full-time staff, more net additions to part-time staff, and little change in hours.
On balance, wage pressures continue to be muted; reports of tight labor markets are scattered by region and occupation. Contacts tend to note significant price increases only in association with commodity price hikes that are more readily passed through to customers. Several contacts from banking and finance noted that wage pressures are real and rising but that firms in many sectors are using technology whenever possible to substitute for labor.
Pennsylvania staffing firms have remained very busy since the start of the year. Contacts from staffing firms in labor markets with lower unemployment rates have noted greater wage pressure, while contacts operating in markets with higher unemployment rates report minimal wage pressure.
Prices
Price pressures appeared to ease a bit, although on balance, levels continued to rise modestly. Nearly two-thirds of firms' contacts reported no change at all in prices paid and prices received. Of the remaining firms, more reported increases than decreases, but the differential has diminished. Homebuilders noted rapidly rising lumber costs due to recent tariffs imposed on Canadian lumber. Overall, the sales prices of existing homes rose modestly, although this varied across markets and price categories.
Looking ahead one year, firms anticipate a 2.25 percent increase in prices received for their own goods and services -- slightly higher than one quarter prior. Firms also reported expectations of 2.50 percent annual inflation for consumers -- a bit lower than last winter.
Manufacturing
On balance, manufacturers continued to indicate moderate growth with higher percentages of firms reporting increases in current activity and shipments this period compared with the prior period. However, new orders began to soften late in the current period.
Overall, gains in activity were indicated by many major sectors, including the makers of paper products, chemicals, fabricated metal products, and industrial machinery; some reductions of new orders and/or shipments were noted by the makers of lumber products, primary metal products, and electronic products.
While manufacturing contacts continued to expect growth over the next six months, the breadth of optimism has narrowed. Less than half of the firms are now expecting growth -- down from two-thirds during the prior period. Similarly, the expectations for future employment and capital expenditures also softened.
Consumer Spending
Nonauto retail contacts noted little sales growth and expressed skepticism that rising consumer confidence has had a significant, positive impact. In fact, one large retailer reported that "if anything, we feel like there has been a little pullback from the lower-end consumer." Moreover, retailers noted that consumers are shifting their spending somewhat away from goods to dining and experiences. That trend, plus the ongoing shift toward online sales, continues to hemorrhage sales from brick-and-mortar stores. One large retailer stated that consumer confidence is a leading indicator that should result in increased sales but not until the second half of 2017.
On balance, auto dealers reported flat year-over-year sales during the current period: Pennsylvania dealers reported that sales were up slightly, while New Jersey dealers reported that sales were down slightly relative to last year's high levels. New Jersey contacts did note a little pickup in early May. Generally, dealers expect another strong year of sales even if a bit below last year's level. Manufacturing incentives are helping to sustain sales, but maintaining the same level of profitability is more of a struggle.
Tourism activity continued to grow at a modest pace, according to several contacts. After a slower first quarter, several events lifted Philadelphia area hotel and restaurant activity to stronger levels. A Delaware shore contact noted that bookings and rates are higher than last year at hotels representing several price points. Even in Atlantic City, casino revenues are beginning to eke out slight increases on an ongoing year-over-year basis.
Nonfinancial Services
Third District service-sector firms reported modest growth in general activity -- slowing a bit from the moderate pace of the prior period. Most indicators, especially new orders, suggested slower growth; however, all were representative of a normal pace for the Third District. One large service-sector firm noted continued growth of its consumer base and improved credit behavior of its base; the firm also noted unexpected weakness from part of its business-oriented sales. Expectations about future growth have also abated since the prior Beige Book period but have remained quite positive with nearly 60 percent of the firms anticipating increased activity.
Financial Services
Financial firms reported modest growth of overall loan volumes (excluding credit cards) after relatively little change during the prior Beige Book period. Commercial real estate loans, residential mortgages, and auto loans contributed the strongest growth in loan volume. Commercial and industrial loan volumes were up slightly, while home equity loans were essentially flat. Credit card volumes are highly seasonal but have grown over the year at a modest rate and grew during this Beige Book period at a faster rate than the change observed over the same period last year. Banking contacts continued to express cautious optimism for slow, steady growth.
Real Estate and Construction
Homebuilders continued to report moderate increases in traffic and contract signings and expressed concerns that the labor supply will not support higher levels of construction activity. A South Jersey builder attributed the gains to greater confidence borne of increased jobs and income.
Brokers in most major Third District housing markets noted that existing home sales continued to strengthen from a slight pace of growth last period to a modest increase this period. The spring selling season failed again to trigger a significant influx of new inventory. In some areas, rental market activity is increasing. Still, brokers expect to end the year with somewhat higher sales totals than last year.
Nonresidential real estate contacts covering much of the Third District reported modest growth, as the existing high levels of construction activity broadened across sectors and geographically throughout the region. Overall, leasing activity changed little, although contacts noted that deals within the Philadelphia office market were a bit below expectations until late in the current period.