December 4, 2013
Aggregate business activity in the Third District continued to rise at a modest pace during this current Beige Book period (beginning with the first partial week of October). Reports from most sectors changed little. However, existing home sales resumed a moderate pace of growth (albeit from low levels), and manufacturing activity slowed to just a slight pace of growth. Sectors that continued to expand at a modest pace included residential construction, general retail sales, tourism, staffing services, and commercial real estate leasing. Commercial real estate construction continued to expand only slightly. The broad general services sector continued to grow at a moderate rate, and auto dealers continued to report strong sales activity. Loan volumes at Third District banks grew at a modest pace across most categories, and credit quality continued to improve. Contacts reported little change to the slight overall increases in wages, home prices, and general price levels--similar to the last Beige Book period.
Despite a slower pace of growth in some sectors, contacts overall maintained an outlook for moderate growth--similar to the last Beige Book. Contacts in most sectors continued to express confidence in the underlying economy. In particular, manufacturers and service-sector firms expressed strong confidence in the U.S. economy and in global conditions. In regard to hiring and capital expenditure plans, firms continued to expand cautiously, as they face ongoing uncertainty from federal fiscal debates and implementation of the Affordable Care Act.
Manufacturing
Third District manufacturers have reported continued increases in orders and shipments at a slight pace of growth overall since the last Beige Book. One-third of all firms reported increases--about the same as before. However, one-fourth of the firms reported decreases--somewhat higher than before. The makers of food products, paper products, fabricated metals, and instruments have reported gains since the last Beige Book. Reports of decreases came from the makers of lumber and wood products, chemicals, primary metals, and industrial machinery as well as the makers of stone, clay, and glass products. Some reports reflect seasonal trends. Firms across several sectors noted a reduction in activity due to the government shutdown. One contact reported: "We definitely noticed a quieter period during the first two weeks of October." Another said that "the debt ceiling debate is having a chilling effect on demand." Despite disruptions from the shutdown, one large industrial supplier reported that conditions have been improving steadily since a trough in July.
Significantly more firms (over half) reported increases in their total workforce compared with the firms that reported increases one year ago (one-third). Also, the average rate of capacity utilization reported by firms was slightly higher this year. Optimism that business conditions will improve over the next six months remained high although not quite as high as during the prior Beige Book period. While over half of the firms continued to anticipate increases in activity, some firms expected decreases in activity, where there had been none before. One contact reported that "clear fiscal policy can help spur more growth, while fiscal dysfunction will most likely derail economic activity. I do not know what to expect for early 2014." Though still positive overall, contacts have reported somewhat lower expectations of hiring and capital spending plans since the last Beige Book.
Retail
Third District retailers have continued to report modest growth overall since the last Beige Book. Contacts cited some negative impacts from the government shutdown and cautioned that year-over-year comparisons might be overly strong due to last year's impacts from Hurricane Sandy. Retailers reported hopeful, but very uncertain, expectations for their all-important 2013 holiday season. Shifting from the longest shopping season last year to the shortest shopping season this year has prompted considerable jockeying by traditional and online retailers over the timing and scope of their promotional offerings. More stores plan to open on Thanksgiving Day than ever before; some Black Friday deals are being offered earlier. Retailers may gain more clarity after Black Friday and Cyber Monday results are tallied, but a complete picture may require sales results for November, December, and January.
Auto dealers have reported continued strong sales since the last Beige Book period. Pennsylvania dealers reported some softness during the government shutdown. New Jersey dealers reported stronger sales activity but cautioned that year-over-year comparisons for October through year-end will be affected by last year's storm impacts--first as sales lagged during the storm and its immediate aftermath, then soared as replacement vehicles were purchased. Dealers reported that they remain bullish on sales for "at least the next twelve months."
Finance
Overall, Third District financial firms continued to report modest increases in total loan volume. Most loan categories appeared to grow somewhat; however, contacts reported essentially no change in commercial real estate loan volumes. Demand remained strong for financing of multifamily housing projects. Several contacts noted that consumers are increasing their use of home equity lines rather than refinancing to do home improvements. Contacts reported that the low interest rate environment has been helpful for businesses generally and that borrowers' financial statements are looking better. However, small businesses remained "reluctant to borrow." Banking contacts continued to express concerns about aggressive competition on rates and terms, suggesting that credit standards have continued to ease slightly. Overall, most bankers remained optimistic, albeit for continued slow, steady growth.
Real Estate and Construction
Third District homebuilders have reported little change in their modest pace of activity since the last Beige Book. One builder reported greater interest in the last few weeks after weaker activity at the outset; his competitors had struggled early as well. With recent small drops in gas prices and interest rates and the rise in stocks, he wondered where the buyers were. Another builder reported that the government shutdown and general malaise seemed to be contributing to the soft demand. Another builder reported that contractors remain reluctant to invest in new capacity and to hire workers requiring training. Instead, contractors are "stealing" skilled labor from each other. According to residential real estate brokers, sales of existing homes resumed double-digit growth rates (year over year) in most of the Third District's major metropolitan areas. Reported increases ranged from 17 percent in October for the Lehigh Valley to 27 percent in the Harrisburg area. Contacts for the Philadelphia metropolitan statistical area and southern New Jersey also reported growth in excess of 20 percent. The inventory of homes for sale continued to fall in all markets.
Nonresidential real estate contacts indicated little change in the slight growth rate of construction and the modest pace of overall leasing activity. Demand remains strongest for new construction of industrial buildings, hospitals, schools, and other institutions. Multifamily buildings for apartments and condos also remain in greater demand. Leasing agents, management companies, and commercial market analysts remained optimistic for steady progress in various sectors and locations within the Third District.
Services
Third District service-sector firms continued to report a moderate pace of growth overall; staffing firms and tourism maintained a more modest pace. Tourism along the Delaware and New Jersey shores is seasonably slow. Storm-impacted areas of the Jersey shore continued to experience somewhat lighter traffic than normal but most parts of the Jersey shore as well as Delaware beaches experienced normal activity. Tourism is expected to be back to normal next year, except for those few areas that lost the greatest number of homes during the storm.
Other service firms reported modest to moderate growth rates. Contacts described growth during the recent Beige Book period as "steady" and "nothing exciting," with no significant impact from the government shutdown. The steady recovery in the residential housing sector was cited by contacts from a variety of service sectors as underpinning their own steady gains. Staffing firms also reported steady growth in demand for temp placements, especially in manufacturing, distribution, and health care. Overall, service-sector firms remain confident that current trends will continue with a possibility for a slightly faster pace of growth.
Prices and Wages
Overall, Third District contacts reported no change to the steady, slight pace of price level increases, similar to the previous Beige Book. Manufacturing firms reported that prices paid and prices received moved higher again. Auto dealers and general retailers reported little change in pricing, and most builders reported holding prices steady. One builder offered price incentives in October that drove additional sales. Many contacts reported coping with extremely tight margins. Generally, real estate contacts continued to report rising prices for lower-priced homes, while higher-priced homes are aligned to local market conditions. Very few contacts are seeing wage pressures, other than for a few highly skilled occupations.