Beige Book Report: Philadelphia
September 6, 2023
Summary of Economic Activity
On balance, business activity in the Third District continued to decline slightly. Consumer spending was down in most sectors, including retail, restaurants, autos, and tourism. High interest rates continued to constrain the available inventory of new homes and have also excluded many low-asset consumers from purchasing homes or cars. Employment edged up as labor availability continued to improve. Wage growth and inflation continued to subside – both continued to grow within a modest range. Overall, contacts reported far fewer supply chain disruptions and a lower (steadier) cost of goods for their inputs. Contacts continued to note tighter credit standards. Credit quality remains very good, despite a slight rise in delinquencies. On balance, firms continued to expect slight growth over the next six months – weaker than the norm for an expansionary period. Sentiment is divided. A few contacts stated that their sectors were in a recession. However, most expressed that there were no signs of a recession, and many were more optimistic for a soft landing.
Labor Markets
Employment appeared to edge up after falling slightly during the prior period. Staffing firms and other contacts reported an improving labor market, with more job candidates, better retention, and fewer callouts for sick time, but many also noted a lower quality of applicants.
Contacts noted few layoffs but less job loyalty. Although turnover has improved, it remains high during a worker's first year. Several contacts noted burnout of tenured employees, especially in health care, and also observed that an emphasis on return-to-office strategies significantly impacts working single mothers.
In our monthly surveys, employment grew slightly as the share of nonmanufacturing firms that reported increases in full-time and part-time jobs rose. This was offset, in part, by a rising share of manufacturing firms reporting a decline in overall jobs.
Firms reported that wage inflation remained at a modest pace overall – near pre-pandemic levels – and continued to slowly subside. Moreover, firms expected worker compensation increases to subside further in 2024.
In our monthly surveys, the distribution of nonmanufacturing firms reporting higher or lower wage and benefit costs per employee remained typical of the pre-pandemic era, when modest wage growth prevailed. Contacts noted some ongoing wage pressure from low-skill workers, especially among smaller firms, but that unusually high salary demands from professional workers had waned.
On a quarterly basis, firms' expectations of the one-year-ahead change in compensation cost per worker fell to a trimmed mean of 4.3 percent in the third quarter of 2023, from 4.6 percent in the second 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 fell to 4.4 percent for manufacturers and to 4.1 percent for nonmanufacturers.
Prices
On balance, inflation subsided further in the third quarter – continuing in the more modest range that began in the second quarter. Moreover, reports of price increases were below historical trends for manufacturers' inputs and for nonmanufacturers' outputs. Expectations of future price hikes edged lower.
Contacts reported that increases in prices received for their own goods and services over the past year edged lower in the third quarter of 2023 compared with the second quarter. The trimmed mean for reported price changes, as indicated by responses to our quarterly survey questions, fell to 4.5 percent from 4.6 percent for all firms. Price increases remained at 3.7 percent among nonmanufacturers and fell to 5.3 percent from 5.8 percent for manufacturers. Reported price increases had peaked during 2022 at 5.8 percent for nonmanufacturers and at 10.4 percent for manufacturers.
In our monthly surveys, the diffusion indexes remain somewhat elevated for prices paid by nonmanufacturers and for prices received by manufacturers compared with their nonrecession averages. However, for prices paid by manufacturers and for prices received by nonmanufacturers from consumers and other buyers, the indexes are below their nonrecession averages.
Looking ahead one year, the increases that firms anticipated in the prices for their own goods fell further – the trimmed mean for all firms fell to 3.7 percent in the third quarter of 2023. It has fallen from a peak of 5.9 percent in the fourth quarter of 2021. The expected rate of growth edged up to 4.1 percent for nonmanufacturers but fell to 3.3 percent for manufacturers.
Manufacturing
Manufacturing activity turned positive in the latter half of the period – generating slight growth overall after a year of declines. The August indexes for general activity and for new orders were just above their nonrecession averages. The sudden uptick in the indexes was primarily driven by fewer firms reporting decreased demand rather than by more firms reporting increased demand.
Most contacts noted ongoing improvements in the supply chain, with a return to normal for many. Despite the up-tick, sentiment weakened, as expressed by one contact, who said, "The chatter is things are slowing down; we are just not seeing or experiencing [a recession]." Large firms with extensive linkages to the broader economy also noted steady activity and no signs of a recession.
Consumer Spending
Consumer spending continued to decline slightly. Contacts noted that consumers were purchasing fewer items and were trading down by shopping for lower-priced goods and at discount stores. A fast-casual restaurateur reported a slowdown and noted "consumer fatigue from price increases." However, this behavior was described as a "slight belt tightening," not as a recession.
Auto dealers reported a slight decline overall, although sales held steady for some. While inventories continued to improve, interest rates and high prices have excluded some buyers. Several contacts noted that sales of some electric vehicle models had softened.
Tourism contacts reported a slight decline overall – led by falling demand from high levels of activity at many Third District leisure destinations, in part because more travelers are going abroad again. The recovery at urban destinations leveled off.
Nonfinancial Services
On balance, nonmanufacturing activity declined slightly – after a more modest decline in the prior period. Contacts noted fewer concerns of a recession – invoking a soft landing instead. The index for expected growth over the next six months has risen since the prior period – nearly to its nonrecession level, although it slipped a little in August.
Financial Services
The volume of bank lending (excluding credit cards) resumed growing moderately during the period (not seasonally adjusted) – after slowing to a modest pace last period. Loan growth was also modest during the comparable period in 2022.
During the period, District banks reported strong growth in home mortgages and auto loans, modest growth in other consumer loans, and slight growth in commercial real estate lending and commercial and industrial loans. The volume of home equity loans fell slightly. Credit card volumes rose moderately following a stronger surge last period. The pace was also slower than the comparable period last year.
Banking contacts and large service companies continued to report good credit quality – noting only small upticks in loan delinquencies, which remain at very low levels. Market participants noted that higher interest rates and tighter credit standards had sidelined many deals and were especially challenging for small businesses.
Real Estate and Construction
Existing home sales resumed a slight downward trajectory – well below the prior-year level. Brokers noted that high interest rates are now constraining the demand for existing homes largely to high-asset buyers. However, that demand remains greater than the still-shrinking inventory – driving prices higher and low-asset buyers into rental units. New home builders reported a steady flow of contract signings as well-heeled buyers sought alternatives to the sparse existing home market.
Market participants in commercial real estate reported a slight uptick in construction activity. While the demand for new office and warehouse space has largely evaporated, ongoing bids for institutional, multifamily residential, and public infrastructure projects have extended the pipeline of new projects and sparked a "shred of optimism." The office market contracted modestly as leases rolled over into spaces with smaller footprints.
For more information about District economic conditions visit: https://www.philadelphiafed.org/regional-economy