Beige Book Report: Philadelphia
July 12, 2017
Summary of Economic Activity
Aggregate business activity in the Third District grew slightly over the current Beige Book reporting period--a retreat from modest growth that had occurred during the prior period. Manufacturing continued at a moderate pace of growth, while nonfinancial services, new home sales, and tourism continued to grow modestly. However, auto sales and construction activity exhibited essentially no growth, if not a slight decline, and nonauto retail sales declined modestly. On balance, employment and wages continued to grow at a modest pace, while prices edged only slightly higher. Overall, firms appear to have lowered their expectations somewhat to modest growth over the next six months.
Employment and Wages
Employment has continued at a modest pace of growth. Manufacturing firms reported little change in employment and in the average hours worked compared with the prior period. Employment indicators from nonmanufacturing firms were mixed, as contacts noted more net additions to full-time staff, fewer net additions to part-time staff, and a slight increase in hours.
On balance, wage pressures continue to be muted; the percentage of nonmanufacturing firms that noted rising wage and benefit costs is as low as any time in the past three years. Wage pressures continued to be greater in those markets with low unemployment rates.
Pennsylvania staffing firms struggled to find qualified and committed workers. Staffing contacts reported spending more time and money on recruiting labor and refilling positions after the initial hire quit, sometimes after just a few days. Workers appear to have less loyalty to the job, and more job-hopping is showing up on résumés. However, one large retailer reported having no difficulty getting quality job candidates in locations throughout the District after raising its base wage last year.
Prices
On balance, price levels rose slightly as price pressures appeared to have eased off a prior modest pace. Of contacts responding, about two-thirds reported no change at all in prices paid and prices received. Generally, prices have held firmer for raw inputs to and intermediate goods from manufacturers, while nonmanufacturing contacts reported significant drops in prices paid for their inputs and received for goods sold.
Retailers and food service providers noted that ongoing low commodity prices have helped their margins, while homebuilders are facing 20 percent higher lumber costs caused by trade tariffs against Canada. Contacts noted that the added cost can be more easily absorbed while building high-end homes, but can make low-end homes less viable to bring to market.
Manufacturing
On balance, manufacturing firms continued to report moderate growth in general activity; however, the pace eased off once more. During the prior period, the pace of new orders lessened; this period, the pace of shipments slowed. Still, the pace of activity appears somewhat stronger than is typical of expansionary periods in the Third District.
The makers of paper products, chemicals, fabricated metal products, and industrial machinery continued to note gains in activity; these were joined by gains reported by the makers of electronic products. Firms in the primary metal sector appeared to be gloomier, noting reductions of new orders and shipments.
Generally, manufacturing contacts continued to expect growth over the next six months; however, the percentage of firms expecting future increases edged down slightly for employment, capital expenditures, and general activity.
Consumer Spending
Nonauto retail contacts noted modest declines in sales overall, as apparel sales "continued to be hammered." Operators of outlets and traditional malls have been buffeted by a surge in retail bankruptcies. Even convenience store contacts noted that sales growth was below expectations, as lower-income households have continued to reduce spending.
On balance, auto dealers reported a slight decline in year-over-year sales during the current period, with Pennsylvania sales edging up and New Jersey sales declining modestly relative to last year's high levels. Falling used car prices have been a contributing factor to softer demand for new cars. Dealer profitability continued to be a struggle, and some dealers and analysts are revising year-end sales totals downward.
Tourism activity continued to grow at a modest pace, according to several contacts. Delaware shore contacts noted exceedingly heavy traffic on the roads and significant tourist spending, but that last-minute bookings had not lifted hotel occupancies as much as expected. Still, bookings remained ahead of last season. Atlantic City casino revenues also remained up over the prior year.
Nonfinancial Services
Service-sector firms continued to report modest growth in general activity, with some notable improvement in sales (or revenues) over the prior period. One large service-sector firm noted that growth remained slow and a bit below expectations, prompting the firm to institute discretionary delays in filling vacant positions. An area advertiser noted lower demand from local auto dealers, but more demand from the health-care and financial sectors.
Expectations about future growth have ebbed further since the prior Beige Book period but have remained positive with a little over 50 percent of the firms anticipating increased activity.
Financial Services
Financial firms reported slight growth of overall loan volumes (excluding credit cards)--a bit slower than the modest growth that had occurred during the prior Beige Book period. Commercial real estate loans and auto loans exhibited strong growth in loan volume; in contrast, mortgages and home equity loan volumes were essentially flat, while commercial and industrial loan volumes declined. 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 robust pace similar to the change observed over the same period last year.
Banking contacts tended to describe the economy as stable and their loan portfolios as healthy with low delinquencies and few areas of concern.
Real Estate and Construction
Homebuilders generally reported a slight decline in activity, following moderate growth in the prior period, although one builder noted a pick-up in mid-June. Contacts reported ongoing difficulty in securing skilled labor but stated that as long as overall demand for new construction remains soft, so too will the wage pressures.
Brokers in most major Third District housing markets continued to report modest growth of existing home sales, but no increase of inventories. In the Greater Philadelphia area, pending sales of houses (under contract) dropped slightly. Overall, existing home prices continued to edge up with some variance across markets and price categories.
Nonresidential real estate contacts reported essentially no change in construction activity, which had grown modestly last period, although individual markets do vary by sector and geography. One contact noted that the construction pipeline may have begun to diminish. Leasing activity continued to exhibit little change overall. Rents were rising nearly everywhere for industrial/warehouse space; contacts noted plenty of demand and that new buildings continue to lease up before completion. However, rent concessions have emerged for multifamily units in the city of Philadelphia.
For more information about District economic conditions visit: www.philadelphiafed.org/research-and-data/regional-economy