November 26, 2025
Summary of Economic Activity
Economic activity in the Third District was already trending down when the government shutdown spurred further economic disruption—driving modest declines overall across most sectors. Employment levels also fell, and workers appeared to be shifting from full- to part-time work. Wage pressures have generally eased compared with 2021, but contacts noted that reduced labor supply from immigration policies and rising health-care costs have increased total compensation. Price pressures continued to pop up with increasing harm to low- and now middle-income households. Small businesses have also been struggling to survive amid uncertainty driven by state and federal government actions. Nonmanufacturing firms were divided in their future expectations, while manufacturers remained broadly optimistic.
Labor Markets
Employment appeared to decrease slightly following a slight increase during the last period. Based on recent surveys, most firms reported no change. Among firms reporting a change, manufacturers reported higher employment levels, but the much larger nonmanufacturing sector noted declines.
A staffing contact observed that increased reports of layoffs were a sign of a normal staffing cycle, indicating that large companies were confident that they could get workers back when needed. During the interim, more temps are being used at reduced hours.
A restaurant contact noted that, in 2021–2022, there was an exodus of workers to warehouse jobs. Now, "they haven't lost their jobs, [but] they've had their hours reduced." To augment lost wages, they're returning and picking up part-time restaurant jobs.
In a broad annual survey of all contacts, 38 percent expected employment to increase over the next four quarters, 44 percent expected no change, and 19 percent expected a decrease. The net 19 percent of the firms that hope to hire is the lowest share we've recorded since 2011; the average is 39 percent.
Firms anticipate shedding jobs mostly by attrition, less so via layoffs. Many contacts noted that even modest deployments of AI would enable them to not refill some jobs or to skip a recruiting class of entry-level workers.
Wage inflation appears to have steadied at a modest pace—typical of its long-run average. Most contacts reported nominal wage increases in the 2.5–3.0 percent range but cited higher increases for total compensation due to rising health-care insurance premiums. One staffing contact observed that while wage pressures are significantly lower than in 2021, recent immigration policies are causing a lot of managers to raise wages to compete for a smaller pool of reliable unskilled workers.
Prices
On balance, firms' prices continued to rise at a moderate pace. Firms continued to report cost pressures from tariffs, insurance, health care, and energy. In our monthly surveys, the diffusion indexes for prices paid and prices received broadened among manufacturers and were well above their nonrecession averages. These indexes for nonmanufacturers narrowed but were still at or above their nonrecession averages.
When asked if their customers had become more price sensitive since last quarter, 37 percent of manufacturing firms and 59 percent of nonmanufacturers indicated greater sensitivity. Consumer-facing firms reported difficulty raising prices, as more consumers search for discounts and cash in loyalty points. A restaurateur observed that although family restaurants are full, competition has driven menu pricing into unprofitable territory.
However, when asked how their competitors will respond to any clearly anticipated industry cost changes, over half of the firm' expected their competitors to raise prices and to do so (typically) in two to three months. One manufacturer noted that "our larger competitors will raise prices in the first quarter of 2026. Not because it is justified, but because they can."
Manufacturing
Manufacturing activity decreased modestly following moderate growth in the prior period. About one-third of the firms reported decreases in shipments and new orders, while most of the balance reported no change. The index for general activity also turned negative.
In comments, tariffs were the most frequently cited challenge, followed by the availability of skilled labor and health-care–related labor expenses. One firm noted that "tariffs continue to make our products less competitive due to the high percentage of parts that cannot be sourced in the United States." To address labor concerns, firms have deployed in-house and external training programs plus made investments in technology to reduce head count.
Manufacturers remained optimistic about growth over the next six months. More than half of the firms expect increases in new orders and shipments, and over one-quarter expect to increase future capital expenditures.
Trade and Services
On balance, firms across a broad spectrum of nonmanufacturing industries reported a modest decline in activity, reversing a slight increase in the prior period. The new orders index turned sharply negative, and the sales/revenues index turned slightly negative.
Retailers (nonauto) reported stagnant sales to modest declines over the current period. One contact noted that low-income consumers have been spending less for most of the year. Now a similar pattern is emerging among middle-income households, according to several contacts. Another retailer attributed a noticeable pullback in October's consumer purchases to the loss of SNAP benefits and other effects of the government shutdown.
Auto dealers reported a modest decline in new car sales, following a slight decrease in the prior period. New Jersey dealers blamed the gubernatorial election, with political campaigns competing for ad space. Pennsylvania dealers said sales were spotty during the government shutdown.
Tourism activity had been slowing, then declining throughout the year—reaching modest declines in the prior period. When the government shutdown occurred and flights were canceled, even a professional tourism analyst was unable to attend a week's worth of far-flung meetings after spending the better part of a day on the tarmac. At best, activity remained modestly down.
Expectations for growth in the next six months were evenly distributed, with firms split into thirds expecting increases, no change, and decreases, for a diffusion index of zero.
Real Estate and Construction
Existing home sales continued to decline slightly during this period, as did inventories and affordability. New-home builders reported modest declines in sales and construction activity. One noted that general activity was slightly below an acceptable level. Another reported that sales were significantly below last year's levels. However, both builders noted that subcontractors were widely available and at lower prices because demand was low.
In nonresidential markets, contacts reported that design and development work continues, but some projects have been slowed because of uncertain funding. The pipeline of construction activity has also diminished, with activity down modestly year over year.
Credit Conditions
The volume of bank lending (excluding credit cards) edged lower during the period (not seasonally adjusted)—similar to the slight decline during the comparable period in 2024. Bank lending fell moderately in the prior period.
District banks reported little change in commercial real estate (CRE) lending and a slight decline in mortgage volume. A large decline in commercial and industrial loans was partially offset by modest and moderate increases in auto loans and home equity lines, respectively. Credit card volumes increased modestly—a seasonal trend observed during the same period one year ago.
One contact noted robust CRE loan growth in the third quarter from various sectors but cautioned it may represent pent-up demand following uncertainty during the flat first half of the year. Another lender reported that originations of consumer loans peaked in July—also noting that they and secondary lenders were tightening credit standards.
Banking contacts continued to report strong credit quality but noted an ongoing rise in delinquencies and defaults, especially among households and small businesses. Various contacts reported that small businesses have struggled throughout the year to survive, as their contracts and funding sources were frozen—first by changing federal rules, then by the 135-day Pennsylvania state budget impasse, and punctuated by the 43-day federal government shutdown.
For more information about District economic conditions visit: https://www.philadelphiafed.org/regional-economy.