March 4, 2020
Summary of Economic Activity
Aggregate Third District business activity resumed a modest pace of growth during the current Beige Book period, after a lull last period. Growth for manufacturing and nonfinancial services firms picked up to a modest and moderate pace, respectively. Financial services and residential construction continued to grow modestly, as did nonauto consumer spending; however, auto sales and tourism slowed from a slight pace of growth to a modest decline and to no change, respectively. Residential construction and existing home sales grew modestly, while nonresidential construction and leasing activity held steady. Labor markets remained tight throughout the District, generating slight employment increases, while wage growth appeared to ebb to a modest pace. Overall, price pressures remained modest. A positive outlook for modest growth over the next six months tended to narrow among nonmanufacturing firms and broaden among manufacturers; however, contacts expressed concerns about potential supply chain disruptions from the coronavirus.
Employment and Wages
Employment continued to grow slightly during the current Beige Book period; however, a slower pace is evident, as the share of firms reporting staff cuts edged up. Nearly two-thirds of the firms reported no change in staff. Average work hours held steady at manufacturing firms and edged up at nonmanufacturing firms.
Difficulty hiring and retaining qualified workers remained a common thread from many firms as they continued to report tight labor market conditions, but the comment was less frequent. Some firms reported offering more competitive wage and salary packages; many firms are automating where possible.
Staffing firms continued to report demand for new job placements from clients and an insufficient supply of qualified labor to fill the orders. One staffing contact noted that many clients were converting current temporary workers to permanent staff and not placing new temp orders.
On balance, firms reported modest wage growth – slower than the prior period’s moderate pace. The share of nonmanufacturing firms reporting wage and benefit increases fell. One contact noted raising staff wages in January – earlier than the firm’s typical March adjustment.
Prices
Most firms continued to report modest increases for both input prices and prices received for their own goods and services. The share of nonmanufacturers reporting higher prices paid retreated after a sharp rise in the prior period. The share of firms reporting no change in prices remained near three-fourths for manufacturers and rose to about three-fifths for nonmanufacturers.
Looking ahead six months, the anticipation of higher prices lessened somewhat among manufacturers. About 40 percent of the firms expected higher prices; about 5 percent expected prices to fall. This was true for prices firms expected to pay as well as for prices firms expected to receive for their own goods.
Manufacturing
On balance, manufacturers reported modest growth, with steadily improving reports throughout the period versus the slight growth reported during the prior period. The percentage of firms reporting increases in shipments and new orders rose to nearly one-half, and the percentage reporting decreases in new orders edged down.
Positive expectations of activity over the next six months broadened among manufacturers. Nearly three-fifths of the firms expected shipments and new orders to increase. However, expectations diminished for future employment and held steady for planned capital spending.
Despite the growth and bullish expectations, several firms cautioned that the emerging coronavirus may disrupt supply chains in the near future. Two firms have already reported delays in receiving needed production inputs. Inquiries and orders to source parts domestically were increasing because of tariff uncertainty and are continuing because of the coronavirus. However, contacts explain that it can take three months to get a part into production, and longer for testing and redesign.
Consumer Spending
Retail contacts continued to report modest growth in restaurants and other nonauto retail sales. Most contacts noted that consumers remained confident but suggested that low gas prices and unseasonably warm weather had also helped sales. Retailers noted no supply disruptions because of the coronavirus.
New car sales appear to have declined modestly on a year-over-year basis. In New Jersey, sales fell modestly through mid-February, although sales had been so unseasonably strong in January 2019 that sales through mid-February 2020 were negative by comparison. Pennsylvania auto dealers (of new and used cars) reported modest gains in January.
Tourism activity appeared to hold steady – after growing slightly in the prior period. A tourism analyst noted that most metrics for the Philadelphia area were positive for 2019, but that national travel was slowing a bit, and the coronavirus was causing headwinds. In addition to fewer tour groups from China, local customers have been avoiding some of Philadelphia’s Asian restaurants and shops, as unfounded fears spread. Area ski resorts have managed with manmade snow, while Atlantic City casino revenues appear to have benefited from unseasonably warm weather in January.
Nonfinancial Services
On balance, activity at service-sector firms grew moderately – a substantial pickup from the prior period. The share of firms reporting increased revenues and new orders rose, and the share reporting decreases in both measures fell significantly. The coronavirus has entered the list of concerns, which still includes tariffs and tight labor markets. One business services firm has already noted disruptions to its vendor’s supply chain. A bank contact was aware of delays that a customer had faced for key production equipment. Over one-half of the firms – less than in the prior period – expect growth over the next six months.
Financial Services
Financial firms continued to report modest growth in overall loan volumes (excluding credit cards) on a year-over-year basis. Credit card lending also remained at a modest pace.
During the current period (reported without seasonal adjustments), volumes appeared to grow robustly for commercial real estate and other consumer loans (not elsewhere classified). Home mortgages grew moderately, commercial and industrial loan volumes grew modestly, and auto lending appeared flat. No major category was negative on a year-over-year basis.
Banking contacts continued to express few concerns over credit quality and lending standards at their own institutions, but some were critical of “crazy deals,” especially from nonbank competitors. One large bank noted that loan quality was “eerily quiet.” Most banking contacts were optimistic about the overall health of the U.S. economy going forward but expressed concerns over the potential impact of the coronavirus.
Real Estate and Construction
Homebuilders continued to report modest growth in contract signings, but with some improvement. One builder noted that traffic through the company’s showrooms was normal but that more people were deciding to buy. Contacts cited low interest rates, warm weather, and a strong stock market as factors spurring purchases. Current sales should keep contractors busy well into September.
Inventory levels for existing home sales dropped to two months – less in the Lehigh Valley. The constrained low level of sales appears to have hit a bottom, as most local markets reported modest increases in year-over-year sales – central Pennsylvania sales were strong. Still, an area broker noted that a lack of new single-family home construction and high student debt were constraining supply and demand, respectively.
On balance, commercial real estate construction appeared to hold steady at relatively high levels, as did sales and leasing activity. Contacts noted that multifamily development was as busy as ever, architects noted a year-end pickup, and accountants to the industry reported no emerging problems. Construction activity is somewhat constrained by available labor.
For more information about District economic conditions visit: www.philadelphiafed.org/research-and-data/regional-economy