Beige Book Report: Philadelphia
May 31, 2023
Summary of Economic Activity
On balance, business activity in the Third District continued to decline slightly. Although the consumer sector appeared to be growing, contacts suggest that higher sales, in part, reflect inflated prices rather than volume. High interest rates are limiting listings of existing homes for sale, which has helped new home builders. Employment edged up as labor availability improved. Wage growth and inflation continued to subside. Wages continued to grow within a modest range, while inflation cooled to a modest range for the first time since early 2021. Overall, contacts reported far fewer supply chain disruptions – instead noting that many sectors of the economy are enjoying unusually high profit margins. Contacts continued to note tighter credit standards, although credit quality remains very good. On balance, most firms noted no evidence of a recession, and most expect modest economic growth over the next six months. However, current sentiment is quite negative, as contacts worry about banking sector woes and the debt ceiling crisis.
Labor Markets
Employment appeared to edge up after holding steady during the prior period. Contacts noted relatively few layoffs and observed that when layoffs or plant closings occur, other firms scoop up the workers. Most firms reported that labor availability continued to improve. A leisure firm noted shortages remain for housekeeping staff and cooks, but that was true before the pandemic.
In our monthly surveys, employment grew slightly as the share of nonmanufacturing firms that reported an increase in full-time jobs rose. This was offset, in part, by a rising share of nonmanufacturing firms reporting a decline in part-time jobs and by a rising share of manufacturing firms reporting a decline in overall jobs. Staffing firms confirmed that the demand for labor continued to be positive but had softened; clients are seeking more permanent placements rather than temporary positions.
Firms reported that wage inflation remained at a modest pace overall but continued to slowly subside. Moreover, firms expected worker compensation to subside further over the coming year. A construction contact noted that wages rose about 2.5 percent for basic trades and about 4 percent to 5 percent for specialty trades.
In our monthly surveys, the distribution of nonmanufacturing firms reporting higher or lower wage and benefit costs per employee was typical of the pre-pandemic era, when modest wage growth prevailed.
On a quarterly basis, firms' expectations of the one-year-ahead change in compensation cost per worker fell to a trimmed mean of 4.6 percent in the second quarter of 2023, from 5.2 percent in the first quarter (and from a peak of 5.8 percent in the third quarter of 2022). Expectations averaged 3.2 percent prior to the pandemic. Expected compensation growth was essentially the same for manufacturers and nonmanufacturers.
Prices
On balance, inflation subsided into a modest range – edging down from the moderate pace observed since October 2022. Moreover, reports of price increases were generally less widespread; however, expectations of future price hikes held steady this period.
Contacts reported that increases in prices received for their own goods and services over the past year were significantly lower in the second quarter of 2023 than in the first quarter. The trimmed mean for reported price changes as indicated by responses to our quarterly survey questions fell to 4.6 percent from 6.0 percent for all firms. Price increases fell to 3.7 percent from 4.7 percent among nonmanufacturers and fell to 5.8 percent from 7.8 percent for manufacturers. Reported price increases had peaked during 2022 at 5.6 percent for nonmanufacturers and at 10.7 percent for manufacturers.
In our monthly surveys, reported increases in prices paid and received were significantly less widespread than one year ago. While the price indexes remain somewhat elevated for nonmanufacturers, among manufacturers, the prices paid index is well below its nonrecession average and the prices received index is negative.
Looking ahead one year, the increases that firms anticipated in the prices for their own goods held at a modest rate – the trimmed mean for all firms remained at 4.0 percent in the second quarter of 2023. It has fallen from a peak of 5.9 percent in the fourth quarter of 2021. The expected rate of growth remained at 3.9 percent for nonmanufacturers and near 4.1 percent for manufacturers.
Manufacturing
Manufacturing activity declined modestly – rebounding from a moderate decline in the prior period. The index for new orders rose from the last period but was negative for the 12th consecutive month. The shipments index also rose but remained slightly negative.
Contacts reported a mix of positive and negative perspectives for current activity and for expectations. Some firms noted that their recent growth reflected the easing of the supply chain problems that constrained their output last year. Several large firms with extensive linkages to the broader economy reported steady or improving demand and no signs of a recession.
Consumer Spending
Consumer spending held steady, at best. One retailer reported strong sales, although underlying volumes may have softened. Several contacts noted that their suppliers or their competitors are maintaining high profit margins – that competition has not emerged to drive prices down for the consumer. Auto dealers reported a modest increase in sales as new car inventories grew. However, the mix is weighted toward high-margin cars, including expensive electric vehicles. Consumer reticence has prompted an increase in incentives.
Tourism contacts continued to report slight growth – noting that the recovery was leveling out. Business travel and urban destinations continued to recover, while leisure travel and resort locations were flattening.
Nonfinancial Services
On balance, nonmanufacturing activity appeared to decline modestly for most of the reporting period, and then late-arriving reports began to show a slight uptick in new orders and sales or revenues. Many contacts expressed concerns about the debt ceiling and prospects for a recession, but few reported signs of a recession. Expectations for growth over the next six months have risen.
Financial Services
The volume of bank lending (excluding credit cards) continued to grow moderately during the period (not seasonally adjusted) – faster than the modest growth observed in the same period last year.
During the period, District banks reported strong growth in home mortgages, auto loans, and commercial and industrial loans. The latter two segments represented a rebound from much weaker growth in the prior period in the wake of two prominent bank failures. Other consumer loans and commercial real estate lending grew modestly, while home equity loans were flat.
Credit card volumes rose modestly after holding steady last period, but the pace was slower than the moderate growth during the same period last year – a potential sign of an ongoing pullback in consumer spending.
Banking contacts reported good credit quality – noting only small upticks in loan delinquencies, which remain at very low levels. In the wake of recent bank failures, most contacts expressed concern about a credit crunch resulting from increased caution, whether from internal policies or external regulatory oversight. One contact described a one-page list of regional banks that had shut off the tap for new loans.
Real Estate and Construction
According to contacts, high interest rates have continued to dissuade existing homeowners from listing their house and losing their low interest rate. Existing home sales fell moderately, and prices resumed rising as the market heated up again. New home builders benefited with unseasonably modest sales, as the resale market slowed.
Market participants in commercial real estate reported a slight uptick in construction activity but noted that the pipeline for future work continues to diminish. Leasing activity fell moderately as weakness in the office market continued to emerge.
For more information about District economic conditions visit: https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis