Beige Book Report: Philadelphia
July 18, 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. Employment also continued at a modest pace; but with hiring constrained by a tightening labor market, wage increases have become more widespread and accelerated to a moderate pace. Despite rising labor costs, most contacts are not yet concerned that inflation will exceed its current modest pace. While manufacturing activity and nonfinancial services maintained a moderate pace of growth, most retail sectors continued at a modest pace, at best. Meanwhile, the construction and real estate sectors tended to be flat or declining. In particular, nonresidential construction activity has begun to decline from its previously high levels and represented the only sector with a significant shift in activity this period. 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; moreover, hiring has broadened among nonmanufacturers since last period. Average hours worked rose over the period for manufacturing firms and nonmanufacturers.
Staffing firms reported ongoing demand for workers, but a scarcity of candidates, plus difficulty hiring and retaining employees. As the job market tightens, wages have risen, and employers have converted more full-time temporary workers to permanent employees than is normal. However, according to one contact, many temp orders continued to be for part-time work.
On balance, wage growth appears to have accelerated to a moderate pace and was more widespread. Over half of the nonmanufacturing contacts reported increases in wage and benefit costs. Several banking contacts also noted rising wages, especially for lower-wage jobs.
Prices
According to most contacts, price increases remained modest. Among nonmanufacturing firms, a little over one-third reported increases for prices paid, and about one-third reported increases for prices received--somewhat higher than in the prior period. Reports of price increases remained widespread among manufacturing firms this period, with half noting higher prices paid and one-third indicating higher prices received for their own goods. Banking contacts expressed little concern over the path of inflation.
One service firm noted that it had been slowly raising wages and was now starting to push prices up to meet the added expense. However, one homebuilder reported no ability to raise prices despite facing rising costs for many building materials.
Looking ahead six months, manufacturing firms continued to anticipate higher prices, with two-thirds expecting increases in prices paid and over half expecting increases in prices received for their own goods.
Manufacturing
Manufacturing activity maintained a moderate pace of growth. About 40 percent of the firms reported an increase in shipments and new orders; however, this percentage was closer to 50 percent for new orders during the prior period.
The makers of chemical products, paper products, fabricated metal products, and electronic equipment tended to note gains in new orders and shipments; the makers of lumber products, primary metals, and industrial machinery reported mixed results. One machinery manufacturer noted that the effects of the steel tariffs have been chaotic to its supply chain--disrupting planned orders, increasing prices, and prompting some panic buying.
On balance, manufacturing contacts continued to expect general activity to increase over the next six months; the percentage of firms expecting future increases remained just below 50 percent. About 40 percent of the firms expected increases in future employment and future capital expenditures, which represented an improved outlook for capital expenditures since the prior period, but a lower expectation for employment.
Consumer Spending
Contacts for nonauto retail sales continued to report modest sales growth in May and June--aided by favorable weather and steady gas prices. Retailers were generally more optimistic than in recent periods due in part to the corporate tax rate reduction; operators of brick-and-mortar stores were further cheered by the recent Supreme Court decision to allow states to tax online sales.
Auto dealers in New Jersey and Pennsylvania reported year-over-year sales that were flat to up slightly in May and June. Year-to-date sales appear to be holding even with 2017's high levels. However, dealers noted greater downside risk than normal for the second half of this year, including disruptions from tariffs, volatile markets, and rising interest rates.
Tourism contacts continued to report modest growth overall. As temperatures climbed past 100 degrees in Philadelphia, expectations rose that more city residents would escape to the shore and the mountains in July and August. Atlantic City's casino revenues fell on a year-over-year basis in May, yet two large casinos reopened in late June.
Nonfinancial Services
On balance, service-sector firms continued to report moderate growth in general activity. Nearly half of the firms contacted reported increases in sales and new orders. One large firm reported that growth has been better than it was in 2017--which had been stagnant--and the firm continues to see no problems with payment collections from its clients. Expectations of future growth became more widespread, with over two-thirds of the firms anticipating increased activity.
Financial Services
Financial firms reported modest growth in overall loan volumes (excluding credit cards)--a somewhat faster pace than last period. Volumes grew moderately in mortgages and in commercial and industrial lending and grew slightly in commercial real estate lending. However, these gains were offset by slight declines in home equity lines, auto loans, and 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 grew at a moderate pace--slow by comparison to the same period last year for this highly seasonal measure. Over the year, credit card lending has grown modestly.
Banking contacts continued to note competitive pressure to raise deposit rates but flagged few concerns about credit standards and no issues with credit quality. Bankers remained generally confident about future economic prospects.
Real Estate and Construction
Homebuilders reported no change in sales and construction activity. In most major Third District markets, sales of existing homes continued to be down moderately compared with the same period last year. According to brokers, inventories remain at very low levels throughout the District.
Overall, nonresidential real estate contacts reported no change in the modest growth in leasing activity. However, as several major projects reach or near completion in Philadelphia, there has been a slow and steady decline in labor hours from previously high levels of construction activity.
For more information about District economic conditions visit: www.philadelphiafed.org/research-and-data/regional-economy