Beige Book Report: Philadelphia
October 24, 2018
Summary of Economic Activity
Aggregate business activity in the Third District continued at a modest pace of growth during the current Beige Book period. The labor market remains tight, which continues to constrain hiring at a modest pace and to apply upward wage pressures at a moderate rate. Price pressures remained modest, with a smaller percentage of firms reporting increases in prices paid and received for their own goods than during the prior period. Nonfinancial services maintained a moderate pace of growth, and manufacturers resumed a moderate pace after slowing last period. Most consumer sectors continued at a modest pace. Construction sectors noted slight growth, while residential real estate sales remained constrained by low inventories; commercial leasing maintained modest growth. The growth outlook over the next six months remained positive, with over half of all firms anticipating increases in general activity; however, key industrial supply firms noted concern that future demand may fall because of excessive inventory buildups by their customers.
Employment and Wages
Employment continued to grow at a modest pace during the current Beige Book period. Over 40 percent of the manufacturing firms reported an increase in net employment, and over 25 percent of the nonmanufacturing firms reported net increases in full-time staff. Also, the percentage of firms that reported decreases in average hours worked was lower than in the prior period.
Several firms noted that their job levels would be higher if they could find and retain employees. One firm noted difficulty launching a third shift because of a lack of workers; another firm--already at full capacity--will add cobots (or collaborative robots) to increase throughput. Likewise, staffing firms continued to report demand for new placements but limitations because of a lack of qualified candidates and difficulty retaining employees.
On balance, wage growth continued at a moderate pace. Nearly half of the nonmanufacturing contacts reported increases in wage and benefit costs. Most large firms reported modest, steady wage hikes, while some smaller firms appear to be catching up with wage hikes in excess of 3 percent. Staffing firms reported that resistance to raising starting wages softened further among their clients after years of holding wages steady.
Price increases remained modest for most firms, and the percentage of firms that reported increases was lower than in the prior period. Among nonmanufacturing firms, about one-fourth reported increases for prices paid and for prices received. Likewise, just one-fourth of the manufacturing firms reported increases in prices received for their own goods. For prices paid, less than half of the manufacturers noted increases--down from nearly two-thirds last period.
One firm noted significant pushback to its announced price hikes from a major retail customer. Other firms reported difficulty meeting the prices of foreign competitors who are not exposed to tariffs on the primary input commodities of their products.
Looking ahead six months, manufacturing firms continued to anticipate higher prices, with just over half expecting increases in prices paid and slightly under half expecting increases in prices received for their own goods.
Manufacturing activity resumed a more moderate pace of growth--after dropping almost to its nonrecession average during the prior period. On balance, the firms reported improvements primarily as an increase in new orders, while shipments remained about the same.
The makers of lumber products, paper products, chemicals, fabricated metal products, electronic machinery, and industrial machinery tended to note gains in new orders and shipments; the makers of primary metal products reported mixed results. Several key industrial suppliers believe their clients placed excessive orders to boost inventories in advance of tariffs and now expect that demand will be lower over the next six months to a year. The firms continued to note greater uncertainty owing to tariffs and the threat of tariffs.
On balance, manufacturing contacts continued to expect general activity to increase over the next six months, with half of the firms expecting future increases in new orders and shipments. The firms' outlook for future employment remained nearly the same, with just under 40 percent expecting increases. However, expectations of future capital expenditures fell further but remain above nonrecession averages.
Nonauto retailers reported strong back-to-school sales during August and modest growth for convenience goods in September and early October. While retailers generally credited the growing economy and strong consumer confidence, the strong August sales also benefited by comparison to weak sales in August 2017.
According to dealers, September year-over-year auto sales were up slightly in Pennsylvania and down modestly in New Jersey. Year-to-date sales remained very close to the high 2017 sales level. Dealers expressed ongoing concerns about rising interest rates and potential tariff impacts on new car prices.
On balance, tourism contacts continued to report modest growth. One contact reported very strong demand in the Poconos region despite bad weather and slightly higher gas prices--2017 was a record year, and 2018 has been even better thus far. Shore activity has been mixed, with Delaware contacts noting strong traffic but weaker spending patterns. Meanwhile, Atlantic City casinos posted strong gains again during the month of August.
On balance, service-sector firms continued to report moderate growth in general activity. However, the percentage of firms reporting increased sales edged back to 50 percent, and the percentage reporting increased new orders dropped to 33 percent. One large service-sector firm noted continued improvement in customer retention and on-time payments. Expectations of future growth broadened slightly, with two-thirds of the firms anticipating increased activity.
Financial firms continued to report modest growth in overall loan volumes on a year-over-year basis (excluding credit cards). During the current period, loan volumes grew at a slightly slower pace than during the same period last year. Volumes (reported without seasonal adjustments) grew moderately in mortgages, in autos, and in other consumer loans (not elsewhere classified). However, these gains were offset by slight declines in home equity lines and by modest declines in commercial real estate lending and in commercial and industrial lending.
Credit card lending also grew at a modest pace on a year-over-year basis. During the current period, credit card lending was flat because of seasonal factors.
Banking contacts continued to note rising competition for loans and bank deposits and noted concerns that credit standards were slipping. However, they cited no signs of credit quality deterioration.
Real Estate and Construction
On balance, homebuilders reported a slight improvement in September following weak activity at the end of August. Contacts reported less optimism for growth in 2019. Inventories of existing for-sale homes continued to fall and to constrain sales. Although a few local markets saw year-over-year increases, sales appear to have declined modestly overall.
Overall, rents remained strong in the slowly growing nonresidential real estate market, especially for offices and industrial warehouses. One firm reports that demand for industrial space continues to outstrip supply in southern New Jersey and the Lehigh Valley. Meanwhile, in Trenton, NJ, and Carlisle, PA, the local labor markets are struggling to supply sufficient labor to meet demand. Commercial contractors noted an uptick in labor hours for August and September, but large projects are winding down, and nonresidential construction activity is expected to wane over the next year.
For more information about District economic conditions visit: www.philadelphiafed.org/research-and-data/regional-economy