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Beige Book Report: Philadelphia

September 4, 2019

Summary of Economic Activity
On balance, aggregate Third District business activity continued at a modest pace of growth during the current Beige Book period. Manufacturing accelerated to a moderate pace of growth, and nonmanufacturing, nonauto retail sales, and tourism continued at a modest pace of growth. Sales for new autos as well as commercial real estate construction and leasing continued to decline slightly. Homebuilding softened somewhat, and existing home sales declined further. Wage increases remained moderate, as the labor market remained tight. Overall, price pressures remained modest. The firms' outlook for growth over the next six months remained positive, with about half of all firms anticipating increases in general activity and less than one-fifth expecting decreases. However, contacts noted a slightly more cautious outlook given trade and market uncertainty.

Employment and Wages 
Employment growth continued at a modest pace during the current Beige Book period. More than one-fourth of all firms reported increases in staff, similar to the previous period, however, the share of manufacturers reporting decreases rose. Average work hours were little changed across firms over the period.

Contacts continued to report that tight labor market conditions were constraining growth, as many noted difficulty in finding qualified workers for needed positions in various sectors. Staffing firms reported continued struggles in finding qualified candidates, with one firm describing the labor pool in its area as "nearly nonexistent."

Wage growth continued at a moderate pace, with contacts reporting wage increases ranging from above 3 percent to above 5 percent on a year-over-year basis. The share of nonmanufacturing contacts who reported increases in wage and benefit costs edged down below 45 percent; only 1 percent reported decreases. Several contacts reported no change or a leveling-off in wages from the prior period.

Prices 
The firms reported overall modest increases for both input prices and prices received for their own goods and services. The share of nonmanufacturing firms reporting increases in prices rose, while the share of manufacturing firms reporting increases held mostly steady. Roughly two-thirds to three-quarters of firms reported no change in prices over the period. Most banking contacts continued to note no signs of inflation.

Looking ahead six months, manufacturers continued to anticipate higher prices for inputs and for their own goods, on balance. The percentage of manufacturing firms that expect to pay higher prices for inputs rose to above 45 percent, and the share expecting to receive higher prices for their own goods increased to almost 35 percent.

Manufacturing
On balance, manufacturers reported moderate growth in activity – a pickup from the slight pace of growth during the prior period. Indexes for shipments and unfilled orders remained above long-term nonrecession averages, and the new orders index improved to an above-average level as well.

The makers of lumber products, chemicals, and fabricated metal products noted gains in new orders and shipments since the prior period. The primary metal and industrial machinery producers reported little change, and the makers of electronic products noted declines. These trends were somewhat weaker this year compared with the same period one year ago for most of the sectors.

Manufacturers' expectations of activity over the next six months improved somewhat. Expectations of shipments and of new orders were above long-term nonrecession averages, with the latter rising above average over the period. Expectations of future employment and planned capital spending also remained above average but were little changed. Some firms reported that uncertainty continued to hamper their investment decisions.

Consumer Spending 
Contacts for malls and convenience stores continued to report modest growth in nonauto retail sales, on balance. Some mall store operators reported modest increases in year-over-year sales and foot traffic. Convenience store contacts continued to report strong sales.

Sales of new autos continued to show signs of slowing but remained near high levels. Pennsylvania dealers reported moderate year-over-year growth through July for both new and used cars and noted recent weakness in new car sales. In New Jersey, early estimates by dealers indicated modest declines in year-over-year sales for July and August, following weak sales in June. One contact cited weakening consumer confidence and rising new car prices as contributing factors.

Tourism activity continued to grow at a modest pace. One contact noted that the Jersey shore season has been fine, with high occupancy, and that restaurants and other retail are performing well. Casino revenues in Atlantic City were up modestly. Occupancy rates recovered in the Poconos for the summer season following softness earlier in the year. Hotel demand in the Greater Philadelphia market was generally in line with the prior period but slowed somewhat, partly owing to shorter booking windows for business travel.

Nonfinancial Services
On balance, activity at service-sector firms continued at a modest pace of growth. The percentage of firms reporting increases in current revenues rose, although the percentage reporting increases in new orders fell. Roughly one-half of firms expect growth over the next six months, unchanged over the period. One large firm noted that it had a modestly more conservative outlook and that it was cutting back on capital spending a bit because of recent uncertainty.

Financial Services
Financial firms reported continued moderate growth in both overall loan volumes (excluding credit cards) and credit card lending on a year-over-year basis.

During the current period (reported without seasonal adjustments), volumes appeared to grow robustly in home mortgages and auto lending. Commercial and industrial loans grew moderately, as did other consumer loans (not elsewhere classified). Home equity lines declined modestly.

Banking contacts continued to note increased uncertainty, but while some contacts reported that businesses were hanging on the sidelines or hitting pause, other contacts have not seen customers holding off on making investments. Contacts generally remained optimistic for the remainder of 2019, although somewhat less so than in the prior period.

Real Estate and Construction
Homebuilders reported a modest decrease in contract signings in the current period, down from the prior period. Contacts noted some strength in southern New Jersey housing markets across most price ranges but a slowing in traffic and sales at all price points in central Pennsylvania.

Existing home sales declined moderately on a year-over-year basis – a larger decline than in the prior period –across most local markets. Low inventories continued to limit sales in all markets. A large Philadelphia broker noted a slight boost in refinancing activity following the FOMC's rate cut.

On balance, commercial real estate construction and leasing activity continued to pull back from relatively high levels. Contacts noted that fundamentals in larger markets seemed sound. Office and industrial markets were characterized by relatively even to positive net absorption, stable vacancy rates, and incremental rent growth.

For more information about District economic conditions visit: www.philadelphiafed.org/research-and-data/regional-economy