Beige Book Report: Philadelphia
April 19, 2023
Summary of Economic Activity
On balance, business activity in the Third District appears to have declined slightly after a small increase last period. Consumer demand appeared to tick down, as contacts detailed slower traffic and smaller purchases by customers. Inflation and higher interest rates continued to weigh on demand for big-ticket items, including homes and autos. Employment held steady as the demand for labor cooled. Wage growth eased to a modest pace, and inflation continued to subside but remained moderate. Overall, firms continued to report less difficulty in hiring and fewer supply chain disruptions. Bank lending to businesses declined, as contacts within the banking industry reported a tightening of lending standards. On balance, expectations for economic growth over the next six months remained subdued, as both manufacturing and nonmanufacturing firms continued to expect slight growth.
Labor Markets
Employment held steady following a modest rise in the prior period. Contacts reported instituting hiring freezes, cutting overtime, and conducting layoffs. Other firms communicated they were not filling positions left open by employee departures. Multiple contacts, including staffing firms, noted that hiring continued to be easier, with more applicants, lower turnover, and less wage pressure. In our monthly surveys, employment growth appeared to be negligible, with most firms reporting no change in employment levels in March. The index for employment in the manufacturing sector turned negative and fell to its lowest level since May 2020.
However, firms still described staffing as one of their primary challenges. Contacts continued to report difficulty staffing night and weekend shifts. Firms revealed the need to frequently move workers along the production line or overstaff shifts to accommodate the ongoing high number of employees calling out.
Firms reported that wage inflation has continued to subside since the prior month and grew at only a modest pace – down from a moderate rise in each of the eight prior periods. In our monthly surveys, the share of nonmanufacturing firms reporting higher wage and benefit costs per employee dropped to 30 percent – its lowest level since March 2021; the share of firms reporting lower compensation levels was just under 5 percent. Contacts noted warehouses have started to cut hours and jobs, which has led to lower wage pressure for other businesses in the area.
Prices
On balance, firms reported that prices continued to rise moderately; however, they noted that the rate of price increases appears to be slowing. In our monthly surveys, the prices paid and prices received indexes declined for both manufacturing and nonmanufacturing firms in March and are below nonrecessionary historical averages, except for the index of nonmanufacturers' input prices. On balance, contacts also noted fewer supply chain disruptions.
Two-fifths of the manufacturing contacts expected to pay higher prices over the next six months, while slightly less than one-quarter expected to receive higher prices for their own goods.
Manufacturing
Manufacturing activity declined moderately – after declining modestly in the prior period. The index for new orders fell from last period and was negative for the 10th consecutive month. Moreover, the shipments index dropped sharply and turned negative. Contacts confirmed that demand continued to slow and backlogs continued to fall.
Despite the decline in manufacturing activity from the prior period, nearly half of the firms estimated increased total production growth for the first quarter of 2023 compared with the fourth quarter of 2022. Most firms reported labor supply and supply chains as slight or moderate constraints to capacity utilization.
Expectations among manufacturers for growth in the next six months remained subdued. The index for future activity turned negative, and the future indexes for new orders, shipments, and employment were little changed. The index for future capital expenditures turned negative for the first time since 2009.
Consumer Spending
On balance, retailers (nonauto) and restaurateurs reported a slight decline in sales in the current period – after those grew slightly in the prior period. Contacts reported sales grew on a year-over-year basis because of higher prices but described a slowdown in customer traffic and fewer items purchased per visit. One contact also noted the expiration of supplemental SNAP benefits was a drag on sales in March.
Tourism contacts reported an uptick in activity, particularly in urban areas, after reporting steady activity in the prior period. Auto dealers again reported a slight increase in sales as manufacturers continued to deliver more new cars. However, contacts noted some softening of demand because of higher financing costs. The increased inventory and softer demand has prompted some dealers to lower prices and reintroduce incentives.
Nonfinancial Services
On balance, nonmanufacturing activity appeared to decline slightly after growing slightly last period. The index for general activity at the firm level fell to a near-zero reading, and the new orders index turned negative as the share of firms reporting decreases exceeded the share reporting increases. The index for sales also declined from the prior period but remained positive.
Financial Services
The volume of bank lending (excluding credit cards) grew moderately during the period (not seasonally adjusted) – faster than the prior period but comparable with growth in the same period last year. Inflationary effects on big-ticket items continued to boost loan volume growth during the current year relative to past years.
During the period, District banks reported moderate growth in home mortgages and modest growth in auto loans, other consumer lending, and commercial real estate lending. Home equity lines declined modestly. Credit card volumes were essentially flat after rising moderately during the same period last year – a sign of a potential pullback by consumers.
Banks reported a strong decline in commercial and industrial loan volumes. Most contacts within the banking industry confirmed a tightening of lending standards or that discussions were ongoing regarding a change in lending behavior, following the failures of Signature Bank and Silicon Valley Bank. Furthermore, multiple contacts noted they focused on lending to existing customers and became more prudent in lending to new customers.
Real Estate and Construction
Homebuilders reported steady sales following an unexpected uptick in the prior period. Contacts continued to attribute the recent improvement to incentives, discounts on older inventory, and new homes built with smaller footprints and lower-cost features.
Existing home sales fell slightly from already low levels in most markets – following a moderate decline in the prior period. Contacts noted that the lack of new listings and the continued decline in housing affordability meant the normally busy spring housing market may fail to materialize.
Requests for assistance with housing and utility bills fell but continued to dominate the share of 211 requests in New Jersey and Pennsylvania. Almost 32 percent of all requests in the two states were related to housing, while 27 percent of the requests regarded utility bills.
Market participants in commercial real estate continued to report steady current construction activity but noted that more projects in the pipeline have been delayed or canceled. Leasing activity continued to slow modestly. Rent growth in multifamily housing eased slightly, and landlords started to offer leasing incentives in some markets. Demand for life sciences space remained strong, but demand for warehouse space softened.
For more information about District economic conditions visit: https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis