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Philadelphia: December 2018

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Beige Book Report: Philadelphia

December 5, 2018

Summary of Economic Activity
On balance, aggregate business activity in the Third District continued at a modest pace of growth during the current Beige Book period, although the pace appears to have eased somewhat. The labor market has tightened further, which continues to constrain hiring at a modest pace and to apply moderate upward wage pressures. Price pressures remained modest. Nonfinancial services maintained a moderate pace of growth, while manufacturing eased back to a modest pace. Nonauto retail sales continued at a modest pace, and auto sales remained flat; however, tourism activity appeared to slow to a slight pace of growth. Construction activity appeared to be flat for residential homes and slightly declining for commercial sectors, while modest declines in existing home sales deteriorated to a moderate drop. Commercial leasing maintained modest growth. The growth outlook over the next six months remained positive, with two-thirds of the nonmanufacturing firms and over 40 percent of the manufacturers anticipating increases in general activity.

Employment and Wages
The pace of employment growth appears to have slowed somewhat during the current Beige Book period but remained modest overall. The share of nonmanufacturing firms reporting an increase in full-time staff fell by half to less than one-fifth, while the share of manufacturing firms reporting an increase in net employment remained near one-fourth. However, average hours worked appeared to fall for more manufacturing firms, while remaining about the same for nonmanufacturers.

Numerous contacts from many sectors noted that jobs were going unfilled for a lack of qualified labor and that employee retention was a growing problem. One staffing firm noted that its roster of qualified job candidates is essentially tapped out – it has become very difficult to find qualified applicants to replenish its candidate pool.

On balance, wage growth continued at a moderate pace. Various firm contacts speak of annual wage increases of around 3 percent. In fact, the percentage of the nonmanufacturing contacts who reported increases in wage and benefit costs fell to just over one-third from nearly half in the prior period. However, staffing firms in markets with lower unemployment rates report that their average wage is up as high as 6.5 percent over the prior year.

Price increases remained modest for most firms, with little change from the prior period. On balance, about one-fourth of the nonmanufacturing firms continued to report increases for prices paid and for prices received, and one-fourth of the manufacturing firms also reported increases for prices received. The share of manufacturing firms reporting increases in prices paid remained just above 40 percent.

One firm reported that it has passed along its costs from 10 percent steel tariffs but that it expects customers to push back if the tariffs increase to 25 percent. Another firm had absorbed the 10 percent tariffs but is slowly raising prices now in anticipation of higher tariffs.

Looking ahead six months, manufacturing firms continued to anticipate higher prices, with nearly 60 percent of the firms expecting increases in prices paid and in prices received for their own goods.

Manufacturing activity eased back to a modest pace of growth – close to its nonrecession average. Likewise, the firms reported a decrease in new orders, while shipments increased relative to the prior period.

The makers of chemicals and of primary and fabricated metal products tended to note gains in new orders and shipments; the makers of paper products and of industrial and electronic equipment reported mixed results. Tariffs remained a major concern for many producers. Still, several firms reported that they were adding capacity, while others noted that operating capacity was constrained by shortages of qualified labor. However, a transportation analyst cautioned that new truck orders are at record levels and could be canceled if clear signs of a downturn emerge.

On balance, manufacturers continued to expect general activity to increase over the next six months; however, expectations eased a bit – slightly below the nonrecession average. Expectations of future increases in new orders, shipments, and employment remained nearly the same as the prior period and at high levels. Furthermore, expectations of future capital expenditures rose to nearly double the indicator's nonrecession average.

Consumer Spending
Nonauto retailers continued to report modest growth. Mall sales remained relatively strong, and contacts noted successful, innovative replacements for anchor stores that were closed because of bankruptcies. Convenience store sales continued to incrementally improve.

On balance, auto sales remained flat compared with high 2017 levels. According to dealers, October year-over-year auto sales rose slightly – Pennsylvania dealers noted growth, while New Jersey sales were flat. However, early estimates of New Jersey's November sales suggest a decline, and dealers are now less optimistic for year-end sales.

According to tourism contacts, activity appeared to grow at a slight pace overall – a bit slower than in the prior period. A Philadelphia analyst expects 2018 to be another record year yet noted a somewhat slower growth rate in October and expectations for a slower fourth quarter. In Atlantic City, sports betting and online gambling continued to boost the total casino take in September and October; however, the take for the traditional casino slots and table games fell to single-digit growth. Moreover, after excluding the two new casinos, the casinos' traditional take declined by more than 10 percent.

Nonfinancial Services
On balance, service-sector firms continued to report moderate growth in general activity. The percentage of firms reporting increased sales edged up to near 60 percent, and the percentage reporting increased new orders remained close to 33 percent. A media firm noted recent gains from election advertising but a "tepid" auto sector. Expectations of future growth held steady, with two-thirds of the firms anticipating increased activity.

Financial Services
Financial firms continued to report modest growth on a year-over-year basis in credit card lending and in overall loan volumes (excluding credit cards). However, during the current period, credit card lending (reported without seasonal adjustments) grew moderately compared with modest growth during the same period last year, while loan volumes (excluding credit cards) grew at a moderate pace compared with slight growth.

During the current period, volumes grew moderately in mortgages and in commercial and industrial lending; grew modestly in commercial real estate and in home equity lines; and declined slightly in autos and in other consumer loans (not elsewhere classified).

Bankers continued to note rising deposit rate pressure and strong competition for quality loans. They continued to cite concerns that credit standards were slipping but noted few signs of credit quality deterioration.

Real Estate and Construction
According to homebuilders, activity appears relatively flat overall; a central Pennsylvania builder noted that traffic and sales disappeared during October and November, while a South Jersey builder noted moderate gains. Both builders said that construction activity had peaked or was peaking and that contractors were beginning to look for work. Existing home sales declined moderately across most local markets. "Inventory is hitting rock bottom," according to one large Philadelphia broker.

On balance, market analysts reported that construction of new commercial real estate may have declined a bit – apartment and warehouse projects remained steady, while office and retail projects began to wind down. One developer reported that its 2019 plan assumes that demand for warehouse space continues to outstrip supply but noted that warning signs were rising, including additional retail bankruptcies, rising interest rates, and lower housing starts. Analysts reported that effective rents rose for apartments and warehouse space but edged up, at best, for office and retail space.

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