Beige Book Report: Philadelphia
October 16, 2019
Summary of Economic Activity
Aggregate Third District business activity continued at a modest pace of growth during the current Beige Book period. Nonauto retail sales accelerated to a moderate pace of growth, and manufacturing continued to grow moderately. Nonmanufacturing and tourism continued at a modest pace of growth. Construction activity for residential and nonresidential buildings appeared to hold steady this period, as did commercial leasing activity; these three sectors had declined in the prior period. Sales of new autos and of existing homes continued to decline – at a slight and a moderate pace, respectively. Labor markets tightened further throughout the District, and wages continued to grow moderately. Overall, price pressures remained modest. The firms' outlook for growth over the next six months remained positive but softened, with less than half of all firms anticipating increases in general activity. Contacts frequently noted ongoing caution in the business plans of their clients and themselves, but most expected current business conditions to continue.
Employment and Wages
Employment growth continued at a modest pace during the current Beige Book period. About two-thirds of nonmanufacturing firms reported increases in staff – a bit higher than in the prior period – while the share of manufacturers reporting increases held steady at about one-fourth. Average work hours have edged down since the prior period.
Tight labor market conditions continued to be cited as a factor in slow hiring by nearly all firms. Staffing firm contacts described "acute pressure" in recent months, which has resulted in still fewer job applicants, more difficulty signing prospective job candidates and retaining current employees, and ongoing wage pressures.
Wage growth continued at a moderate pace, with contacts reporting wage increases ranging from above 3 percent to 6 percent on a year-over-year basis. Reports were further mixed, with some contacts noting that wage growth had steadied and others noting an acceleration. The share of nonmanufacturing contacts who reported increases in wage and benefit costs edged down further to 40 percent; only 4 percent reported decreases.
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 edged lower, while the share of manufacturing firms reporting increases rose. Roughly one-half to two-thirds of the firms reported no change in prices over the period. Most banking contacts continued to note no signs of inflation.
Looking ahead six months, the anticipation of higher prices broadened further among manufacturers. The percentage of manufacturing firms that expect to pay higher prices for inputs rose to above 50 percent, and the share expecting to receive higher prices for their own goods increased to almost 45 percent.
On balance, manufacturers continued to report moderate growth in activity. Although nearly half of all the firms reported no change in shipments and in new orders, the percentage of firms noting increases significantly outstripped those noting decreases for each metric.
The makers of lumber products, paper products, chemicals, fabricated metal products, and industrial machinery tended to note gains in new orders and shipments. Electronics producers reported little change, and the makers of primary metal products reported mixed results. Overall, these trends are not substantially different compared with the same period one year ago.
Comments have been mixed. Several firms noted slowing activity, heightened uncertainty, and ongoing concerns over tariffs; a primary metals producer noted that "customers were hesitant." However, others noted product segments with strong demand and mixed effects from tariffs.
Manufacturers' expectations of activity over the next six months were mostly unchanged. Expectations of shipments and of new orders edged lower but remained above long-term nonrecession averages. Expectations of future employment and planned capital spending also remained above average but rose a bit.
Contacts for malls and convenience stores reported moderate growth in nonauto retail sales – a somewhat faster pace than during the prior period. Mall store operators noted "solid traffic" and moderate year-over-year growth during the back-to-school season. Convenience store contacts continued to report strong sales – boosted by job stability among consumers and great weather.
Auto sales edged lower but remained near high levels – sustained by fleet sales, even as consumer demand continued to decline, according to contacts. Pennsylvania dealers noted that year-over-year sales had started to slow, while New Jersey dealers reported lower August and September combined sales. However, year-over-year sales growth through September year to date remained positive in both states.
Tourism activity continued to grow at a modest pace. A Delaware shore contact reported strong visitor traffic, aided by excellent weather, and noted record levels of spending at local shops and restaurants, even as three new restaurants opened. Atlantic City casino revenues continued growing modestly.
On balance, activity at service-sector firms continued at a modest pace of growth. The percentage of firms reporting increases in current revenues and in new orders remained positive but edged lower. One large firm noted continued improvement in the already low delinquent accounts receivables of its consumer base. This improvement was observed throughout the Third District and the country. Nearly one-half of the firms – slightly less than in the prior period – expect growth over the next six months.
Financial firms reported continued moderate growth in overall loan volumes (excluding credit cards) on a year-over-year basis, although the rate seemed to strengthen somewhat. Meanwhile, credit card lending also continued at a moderate pace but appeared to edge slower.
During the current period (reported without seasonal adjustments), volumes appeared to grow robustly in home mortgages, commercial real estate loans, and other consumer loans (not elsewhere classified). Home equity lines and auto lending grew moderately, while commercial and industrial loans grew modestly.
Most banking contacts described incremental growth of the overall economy, constrained by a tight labor market and low housing inventories, with little shift in low delinquency rates. Banking contacts noted ongoing uncertainty and more widespread talk of a (mild) recession risk in 2020. However, most indicated that they and their clients felt that the U.S. economy was fundamentally sound and that they were planning (cautiously) for ongoing growth next year.
Real Estate and Construction
Homebuilders reported no change in contract signings in the current period, on balance, although reports ranged somewhat from "continued strength" to "slightly off" from the prior period. To varying degrees, builders are shifting their product offerings to capture lower price points; however, production costs remain a challenge.
Existing home sales continued to decline moderately on a year-over-year basis across most local markets, as exceedingly low inventories continued to constrain sales. A large Philadelphia-area broker noted that the trend continued through September and is not expected to shift much in 2020.
On balance, commercial real estate construction and leasing activity seemed to hold steady at relatively high levels. Most contacts were bullish about current activity and noted that while the project pipeline has thinned, groundbreakings, project planning, and new inquiries remained relatively steady. One design firm noted it is struggling to keep pace with demand. Management firms noted positive net absorption, falling vacancy rates, and rising rents in many office and industrial segments.
For more information about District economic conditions visit: www.philadelphiafed.org/research-and-data/regional-economy