April 20, 2022
Summary of Economic Activity
On balance, business activity in the Third District continued to grow modestly in the current Beige Book period. Activity in a few sectors had not yet returned to pre-pandemic levels. Since the prior Beige Book, the rate of COVID-19 cases has remained relatively low, although a rising wave in the Northeast has been nearing the Third District – county by county. The rate of all persons being fully vaccinated edged up to 71 percent. Employment grew moderately as more job candidates began to apply, although the labor market churned further as workers continued to shift jobs and sectors. Wage growth continued to challenge most firms, but the pace of growth appears to have eased somewhat. Prices rose sharply again and remained a key concern for most employers – propelled by rising energy prices and by ongoing supply chain disruptions for manufacturers. On net, expectations for continued economic growth over the next six months fell somewhat for nonmanufacturers and are near their nonrecessionary historical average for all firms.
Labor Markets
Employment grew moderately – a stronger pace than in the prior period. However, a few firms noted that they are reevaluating their employment level and may be ready for some attrition to reduce staff size. The share of firms reporting employment increases rose to near one-third of the nonmanufacturing firms and rose to over two-fifths among the manufacturers. Overall, about one-fourth of the firms reported a rise in average hours worked; a few reported a decline.
Staffing firms as well as many employers noted that more job candidates were applying; however, on-the-job training was required more often, and retention remained a challenge. Contacts noted that many workers have switched fields, which has resulted in more training and more mismatches, followed by more churn in the labor market.
Although wages continued to rise broadly, the wage rate appears to have risen moderately – somewhat less than the strong growth in the prior period. In our monthly surveys, the share of nonmanufacturing firms reporting higher wage and benefit costs per employee edged up to 56 percent in March from 54 percent in February. Virtually no firms reported lower compensation, as has been true in most recent months. However, many firms, including staffing firms, reported that the pace of wage growth has slowed. Still, the prevailing wage growth was sufficient to drive one small local coffee shop out of business when its workers shifted to a nearby chain coffee shop.
Prices
On balance, strong price increases were evident throughout most of the supply chain, from manufacturing costs of production to those costs of nonmanufacturers. However, prices paid and received by nonmanufacturers rose for fewer firms than during the prior period.
The share of manufacturers reporting higher prices for factor inputs increased to 87 percent, while the share receiving higher prices for their own products edged up to 57 percent. The share of nonmanufacturers reporting higher prices for their inputs edged down to 67 percent, while the share receiving higher prices from consumers for their own goods and services fell to 37 percent.
Contacts most often cited the supply chain, followed by the labor supply, as their current key challenges, with the labor market easing for most firms and the supply chain easing for nonmanufacturers. Over the next quarter, most expect energy markets, followed by the supply chain, to represent the biggest constraints.
Nonmanufacturers tended to note that supply chain issues were easing, while some manufacturers noted further disruptions for specific commodities because of the Russian invasion of Ukraine and ongoing production shutdowns in China.
About three-fourths of the manufacturers expect to pay higher prices for their factor inputs over the next six months. Nearly as many expect the prices they receive to increase as well.
Manufacturing
On average, manufacturing activity continued to grow modestly. Overall, the share of firms reporting increases in shipments and new orders edged higher than in the prior period. Backlogs continued to rise, and delivery times continued to lengthen.
Consumer Spending
Retailers (nonauto) and restaurateurs continued to report modest sales growth. Customer traffic patterns began normalizing as the Omicron surge eased, but contacts also noted the first hints of tighter wallets in response to fuel price increases.
Ongoing disruptions to the production and delivery of microchips and other key components continued to limit the availability and sales of new cars. While March sales levels improved slightly over February's, the two-month average remained well below the levels for the same two months in 2021 and also 2019.
Tourism resumed a modest pace of growth, as the Omicron surge dissipated and travelers rebooked business travel, group events, and some leisure travel. Contacts anticipate that domestic leisure travel will stay strong through the summer but that stays may be shortened and spending curtailed at destinations as prices of fuel, food, and rooms rise.
Nonfinancial Services
On balance, nonmanufacturing activity grew modestly – an improvement from the slight growth in the prior period. Overall, the share of firms reporting increases in sales held steady just below half, while the share reporting increases in new orders rose to two-fifths. Moreover, the share of firms reporting decreases in sales and in new orders continued to subside.
Financial Services
The volume of bank lending (excluding credit cards) grew moderately during the period (not seasonally adjusted); by comparison, loan volumes grew at a more modest pace during the same period in 2019. Inflation is contributing to some of this growth.
Loan volumes grew moderately for home mortgages, auto lending, and commercial and industrial lending. Commercial real estate lending grew modestly, but home equity lines and other consumer loans fell modestly. A mortgage services contact noted that rising interest rates had dampened mortgage originations and precluded most home equity lending. Credit card volumes also grew moderately. Typically, credit card volumes fall during this season of the year.
Bankers, accountants, and attorneys noted that ongoing uncertainty and weariness stemming from inflation, COVID-19, and the war in Ukraine have created mental health issues for some households and small business owners. One attorney noted that foreclosures on residential mortgages rose following the end of the moratorium and that a further increase is expected. Another attorney noted that a credit counseling client was struggling to get out of bed. An accountant noted that one client was "completely absent from his business" because of the stress from uncertainty.
Real Estate and Construction
Most homebuilders reported that demand for new homes held steady; however, as costs rise, many customers are shifting toward smaller, less pricey homes. Demand for new rental units remains strong. Following the year-end surge in building permits ahead of the phaseout of a popular 10-year property tax abatement in Philadelphia, permits fell sharply below the norm as this year began.
Existing home sales held steady at high levels. Demand continued to outstrip new listings, and quick sales continued to churn the market – lifting average closing prices to levels at or above average asking prices. Contacts noted that some potential buyers are searching for more affordable housing options in more remote locations and in mobile home parks, or by remaining in rental properties.
Construction activity and leasing activity continued at high levels for industrial/warehouse space, multifamily housing, and institutional projects. Contacts continued to describe concern for the office market. While workers were finally returning to offices, the extent to which firms and workers embrace full in-person, full remote, or hybrid work schedules remained unclear. Several contacts reported the emergence of new specialty stores in the retail sector, which had been dormant through most of the pandemic.
For more information about District economic conditions visit: www.philadelphiafed.org/regional-economy