Beige Book Report: Philadelphia
January 17, 2018
Summary of Economic Activity
Aggregate business activity in the Third District continued at a modest pace of growth during the current Beige Book period. Nonauto retail sales, tourist activity, manufacturing, and nonfinancial services grew modestly, while new home construction and existing home sales appeared to grow slightly. Little change was noted by contacts in nonresidential construction and nonresidential leasing markets. Auto sales appeared to have declined modestly. On balance, employment, wages, and prices continued to grow modestly. Most firms anticipated continued growth over the next six months--a somewhat higher percentage than during the prior period.
Employment and Wages
Employment continued to grow at a modest pace during the current Beige Book period, although reports of net additions to staff edged lower for both manufacturing and nonmanufacturing firms. Average hours worked edged lower over the period for manufacturing firms but rose among nonmanufacturers.
On balance, wage growth held steady at a modest pace, although the percentage of nonmanufacturing firms reporting increases slipped below 40 percent. One manufacturing firm noted that significant annual increases in health-care costs precluded the firm's ability to offer wage increases; several other firms cited difficulties with rising benefit costs. A few contacts commented on the recent news that numerous large firms had announced plans to offer bonuses this year and/or to raise their minimum wage rates.
In one of the District's tighter labor markets, a staffing firm reported that wages had risen 4 percent over the year, while various firms from that same market noted that they were very busy, but the lack of qualified labor was constraining their growth. In the Poconos, the tight labor market was impacting firms' ability to fill low-skilled jobs and middle management positions.
Prices
On balance, price levels continued to rise modestly, although most contacts indicated no change in prices paid and received. Across all contacts, the percentage of firms reporting increases in prices received for their own goods and services was somewhat higher during the current period than the prior period. For prices paid, the percentage of manufacturing firms reporting increases rose, while the percentage of nonmanufacturing firms reporting increases fell.
Retailers and banking contacts reported few signs of inflationary pressure, and builders noted little change to the typical price increases for construction materials. Overall, existing home prices continued to rise, with some variation across markets and price categories.
Manufacturing
On balance, manufacturing activity continued at a modest pace of growth, with a few signs of slight improvement. The percentage of firms reporting increases in new orders rose slightly compared with the prior period but changed little for shipments.
The makers of paper products, chemicals, primary metal products, industrial machinery, and electronic equipment continued to note gains in new orders and shipments; firms in the lumber and fabricated metal sectors reported declines in activity.
A majority of manufacturing contacts continued to expect general activity to increase over the next six months. The percentage of firms expecting future increases for general activity rose above 60 percent. By comparison, the percentage of firms expecting increases in future capital expenditures and future employment held mostly steady at levels just above 40 percent. However, a somewhat higher percentage of firms expected decreases in future employment compared with the prior period.
Consumer Spending
On balance, nonauto retail sales appeared to grow modestly over the holiday season--an improvement over the prior period. Contacts reported that sales started flat, but growth materialized in the weeks before and after Christmas. The abnormally cold December temperatures lifted sales of warm weather apparel, and long lines of last-minute shoppers were noted at mall jewelry stores.
Auto dealers reported modest declines overall in year-over-year sales this period, a further deterioration from slight decreases during the prior period. Nevertheless, sales remain at high levels. While early reports from Pennsylvania dealers suggested a slight increase, later reports from New Jersey dealers noted that the cold weather dampened sales, which are normally very strong in late December due to year-end bonuses. However, this year dealers felt that "people with cash on hand ran to the municipal tax office to prepay property taxes, not buy cars."
Tourism contacts continued to report modest growth overall. A Poconos contact reported that ski resorts were sold out on weekends and that visitors exhibited confidence by extending their stays and keeping restaurants busy. In November, Atlantic City's casino revenues continued to grow modestly relative to the prior year. However, the January 4 bomb cyclone limited activity over this period's final weekend as shore areas dug out from heavy snows and skiers in mountain resorts were greeted by single-digit temperatures.
Nonfinancial Services
On balance, service-sector firms have continued to report modest growth in general activity since the prior Beige Book period. The percentage of firms reporting a higher level of sales has increased since the last period; however, the percentage reporting greater orders has declined. Expectations about future growth have remained positive, with well over half of the firms anticipating increased activity, marking little change since the prior Beige Book period.
Financial Services
Financial firms reported modest growth of overall loan volumes (excluding credit cards)--similar to the prior Beige Book period. Loan volumes grew modestly in home equity lines and auto loans, while mortgages and commercial real estate loans grew slightly. Growth in commercial and industrial loan volumes was stronger, while the volume of other consumer loans fell.
The significant seasonal increase in credit card volumes anticipated for the recent holiday period did occur and was comparable in size to the increase during the same period last year.
Banking contacts described solid ongoing economic growth in most parts of the District. Several noted that previously hot sectors, including commercial real estate and multifamily housing, appear to have plateaued or cooled off a bit. Credit quality was portrayed as very good; one contact reported telling bank staff to "take a picture," as the bank's loan portfolio was so sound.
Real Estate and Construction
Homebuilders continued to report slight growth in activity during the current period. One builder noted that the company's backlog of sales is off considerably from last year and that other local builders are also feeling a slowdown that began last summer.
On balance, brokers in Third District housing markets continued to report slight growth of existing home sales. In most local markets, exceedingly low inventories of houses constrain sales and place upward pressure on house prices.
Nonresidential real estate contacts reported no significant changes in the high levels of overall construction activity. Commercial contractors focused on Philadelphia noted that 2017 was a strong year and that activity should continue through 2018. New project announcements are needed to extend current activity levels into 2019. Rising lease rates and new construction of industrial/warehouse space continued to be noted in many Third District markets. Essentially, little change was noted in the level of leasing activity, although markets vary significantly by sector and geography.
For more information about District economic conditions visit: www.philadelphiafed.org/research-and-data/regional-economy