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Philadelphia: May 2018

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Beige Book Report: Philadelphia

May 30, 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. Nonfinancial services appeared to accelerate to a moderate pace, and manufacturing activity continued to grow moderately. Meanwhile, nonauto retail sales, tourist activity, and nonresidential leasing markets continued at a modest pace. Contacts from new home construction and nonresidential construction reported no change in activity. Following several periods of decline, auto sales appeared to have increased slightly, while existing home sales continued to decline moderately. On balance, employment, wages, and prices continued to grow modestly. However, many contacts raised concerns about rising oil prices and prices for commodities linked to tariffs. The growth outlook over the next six months remained positive, with over half of all firms anticipating increases in general activity.

Employment and Wages
Employment continued to grow at a modest pace during the current Beige Book period. Manufacturing and nonmanufacturing firms reported ongoing net additions to staff; however, hiring has broadened among manufacturers and narrowed among nonmanufacturers since last period. Average hours worked rose over the period for manufacturing firms and nonmanufacturers.

On balance, wages also continued growing modestly, although reports have risen of firms losing skilled employees to competitors and struggling to attract and retain new qualified workers. Increasingly, firms are responding by adjusting their wage structures. The share of nonmanufacturing firms reporting increases remained greater than 40 percent. Banking contacts noted few signs of general wage inflation.

Staffing firms continued to report steady demand for temporary workers and direct hires in several local labor markets, with increased wage pressures in the tightest markets. According to one contact, clients are hiring faster now compared with a few years ago when they were indecisive about whether to hire and whom.

While reports of rising prices are becoming more widespread, on balance, price increases remained modest. Among nonmanufacturing firms, one-third reported increases for prices paid, and less than one-fourth reported increases for prices received – about the same as the prior period. Reports of price increases were more widespread among manufacturing firms this period, with over half noting higher prices paid and over one-third indicating higher prices received for their own goods.

Builders continued to report rising prices, particularly for materials containing lumber, steel, and oil derivatives. Several manufacturers (and their bankers) cited rising prices for aluminum ingot, steel, and oil – some passed along the costs; however, margins shrank for others.

Looking ahead one year, nonmanufacturing firms anticipated receiving significantly higher prices for their own goods and services – a moderate increase from one quarter earlier. Manufacturing firms expected even higher prices, reflecting a small increase from their expectations last quarter. Overall, firms also reported slightly higher expectations for annual consumer inflation.

On balance, manufacturing activity maintained a moderate pace of growth. Nearly half of the firms reported an increase in new orders, and somewhat fewer reported an increase in shipments – just a slight drop from the prior period. Moreover, the percentage of firms that reported a decrease in new orders fell by half since last period.

The makers of lumber products, paper products, fabricated metal products, industrial machinery, and electronic equipment tended to note gains in new orders and shipments; the makers of chemicals and primary metals reported mixed results. One primary metal manufacturer felt that the current slowdown was due to "customers waiting for clarity on the issue of steel tariffs."

Manufacturing contacts continued to expect general activity to increase over the next six months; however, the percentage of firms expecting future increases dropped below 50 percent. The percentage of firms expecting increases in future employment rose to nearly one-half, but for future capital expenditures, the percentage fell to less than one-third.

Consumer Spending
On balance, nonauto retail sales continued to grow modestly. Mall retailers noted sales gains across nearly all categories. As gas prices neared $3 a gallon in parts of Pennsylvania, one contact noted concern but saw no negative impact on spending yet.

Pennsylvania auto dealers reported year-over-year gains in sales for April, while New Jersey reported declines. Dealers in both states noted that sales in early May appeared stronger; however, year-to-date sales are still a bit below last year's very high levels.

Tourism contacts continued to report modest growth overall. A Philadelphia analyst cited gains in hotel occupancy despite absorbing new supply. Shore contacts are generally optimistic for the summer season ahead. Atlantic City's casino revenues fell on a year-over-year basis in March and April.

Nonfinancial Services
On balance, service-sector firms reported moderate growth in general activity – an uptick from the modest pace of the prior Beige Book period. In particular, the percentage of firms reporting increases in sales rose, and the percentage reporting increases in new orders rose significantly. A contact from one large firm also noted that the delinquency rate on customers' accounts remained steady and very low. Expectations of future growth remained high, in fact, the percentage of firms anticipating increased activity rose over 60 percent.

Financial Services
Financial firms reported slight growth in overall loan volumes (excluding credit cards). Volumes grew moderately in mortgages and modestly in commercial and industrial lending. However, these gains were offset by slight declines in commercial real estate lending, home equity lines, and auto loans, and by a moderate decline in other consumer loans (not elsewhere classified). Compared with one year earlier, loans grew modestly, and in all categories except for home equity lines.

During the current period, credit card lending began growing at a moderate pace – ending its long seasonal decline. However, credit card loan volumes have grown moderately when compared with the same period last year.

Banking contacts continued to describe credit standards as unchanged, credit quality as sound, and consumer sentiment and business confidence as high and growing. Numerous bankers noted growing pressure to raise deposit rates, especially from municipal clients.

Real Estate and Construction
Homebuilders reported little overall change in sales and construction activity. A banking contact noted that a former local builder is now earning more by renovating existing homes and managing the rentals.

Sales of existing homes continued to fall moderately in most major Third District markets compared with the same period last year. Brokers continued to blame a lack of new listings for moderately priced homes.

Overall, nonresidential real estate contacts reported no change in high levels of construction activity and in the modest growth in leasing activity. Construction of industrial warehouse space continued apace – "a frenzy," according to one banking contact – faster than the labor supply, according to another banker.

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