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Philadelphia: October 2021

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Beige Book Report: Philadelphia

October 20, 2021

Summary of Economic Activity
On balance, business activity in the Third District grew modestly – a slower pace than during the prior Beige Book period. Moreover, activity in most sectors had still not returned to pre-pandemic levels. The rate of all persons being fully vaccinated against COVID-19 was about 60 percent. However, COVID-19 cases rose throughout most of the period, which was widely cited by contacts as prompting confidence to slump and activity to flag. Many firms reported imposing vaccine mandates with relatively few resignations. Generally, contacts expressed greater concerns about ongoing supply chain disruptions and persistent labor shortages. Net employment continued to grow modestly, while prices and wages rose moderately. About one-half of the nonmanufacturers and one-third of the manufacturers expressed positive expectations for continued economic growth over the next six months – a further narrowing of optimism. Numerous firms indicated that they had learned to produce with fewer employees and, therefore, did not expect to refill all prior positions.

Employment and Wages
Employment continued to grow modestly overall. The share of firms reporting employment increases held steady at one-fifth of the nonmanufacturing firms but edged below one-third among the manufacturers. Overall, increases in average hours worked edged lower among nonmanufacturers (to one-fifth) but rose among manufacturers (to one-third).

Despite the return of children to school and the end of enhanced unemployment benefits, staffing firms and other contacts reported only a slight uptick in new applicants, at best. Many interview candidates were arriving with other offers in hand. Firms are also working harder to retain workers by raising wages. Contacts noted that childcare issues, early retirements, and general burnout continued to depress the labor supply.

Apart from labor supply issues, many contacts do not expect to employ as many workers for the same level of output as they had before. Manufacturers, builders, retailers, and hospitality managers all note that operational changes and automation are allowing their businesses to function with fewer workers.

Wages continued to rise moderately. The share of nonmanufacturing firms reporting higher wage and benefit costs per employee held steady at two-fifths – comparable with pre-pandemic levels. Only a few firms reported lower compensation. Wage pressures remained high for lower-wage jobs; one staffing firm wouldn't accept new clients that offer below $15 an hour. Wage pressures are rising for higher-wage positions as well. One firm is now offering up to $90,000 for a second-year CPA position that might have commanded $65,000 before the pandemic.

On balance, prices continued to rise moderately over the period. The share of manufacturers reporting higher prices for factor inputs edged lower to about 70 percent, while those receiving higher prices for their own products remained near one-half. The share of nonmanufacturers reporting higher prices for their inputs remained near one-half, while the share receiving higher prices from consumers for their own goods and services edged lower to below one-fourth.

About 60 percent of the manufacturing contacts reported they expect to pay higher prices over the next six months, and slightly more than that expected to receive higher prices for their own goods. According to contacts in manufacturing, construction, and finance, there is too much uncertainty and too little labor to pursue capital expansions that might address the product scarcity and high prices resulting from the supply chain disruptions.

On average, manufacturing activity continued to grow moderately. However, while net increases of shipments continued, new orders fell further from the prior period's level. Net backlogs and delivery times continued to increase, but among fewer firms. Net inventories rose again after a brief period of decline.

Contacts reported no end in sight to the ongoing supply chain disruptions. Many firms reported long delays for obtaining key factor inputs while also noting unreliable delivery service of completed orders via their distributors. Overall, production levels and employment remained below pre-pandemic levels.

Consumer Spending
Retailers (nonauto) and restaurateurs reported slight, incremental growth. Some noted that consumers had retreated a bit as COVID-19 cases rose again. Supply chain disruptions and labor shortages continued to limit shelf inventories and hours of operation.

Once again, supply chain issues were most severe for auto dealers. Contacts reported that new car sales were down sharply – inventories on dealers' lots were numbered in single digits or the teens rather than dozens or hundreds as is the norm. The disruptions were no longer limited to microchips. Contacts noted numerous other components that have been held up by plant shutdowns and bottlenecks throughout the global supply network.

Tourism continued to decline modestly. Contacts noted that the Delta variant wave further delayed business travel plans just as leisure travel entered its seasonal downturn. While domestic tourism remained strong at resort locations, contacts in various sectors noted that conferences and trade shows were still being canceled.

Nonfinancial Services
On balance, nonmanufacturing activity grew modestly – a bit slower than last period. The share of firms reporting increases in sales and in new orders held steady; however, the share reporting decreases rose significantly.

Moreover, output remained below pre-pandemic levels for most sectors. Even as some entertainment venues reopened for the first time, other firms reported that consumers had pulled back as Delta variant cases rose. Many firms also delayed their return to the office; one reversed its prior return.

Financial Services
The volume of bank lending (excluding credit cards) held steady during the period (not seasonally adjusted); during the same period in 2019, by contrast, loan volume growth was strong. Commercial and industrial loans continued to contract significantly, while home equity lines fell modestly. Auto lending, home mortgages, and other consumer loans grew modestly, and commercial real estate lending grew slightly. Credit card volumes grew moderately – faster than the slight pace during the same period in 2019.

Bankers, accountants, and bankruptcy attorneys continued to report few problems with bad debt. However, they noted increased mergers and acquisitions, or closings, as small business owners seek early retirement at increasingly younger ages. A dry cleaner closed on the expectation that demand would not return. A bar owner was worried because fewer people were staying between 10:00 p.m. and closing – a period that previously provided a healthy percentage of its profits.

Real Estate and Construction
Homebuilders continued to note a slight decline in sales but still describe the overall market as strong. The number of serious buyers remains limited by higher prices and patience, as most current contracts are for delivery in mid-2022. Existing home sales held steady with no significant increase of new sellers, but somewhat less frenzy from buyers. Multiple offers and cash deals are still common but offers are not as high above asking price as earlier.

Construction activity for nonresidential projects ebbed slightly. While warehouse, institutional, and multifamily projects remain strong, the overall pipeline of new projects narrowed as uncertainty clouds the office market. Likewise, while leasing activity was strong for industrial and lab space, demand for office space fell. Expectations that some firms will downsize their workforces and others will shift to more permanent remote workforces are being realized as the office sublease market has become more active.

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