July 13, 2016
Aggregate business activity in the Third District continued at a modest pace of growth during the current Beige Book period. Employment trends remained the same, with most contacts reporting a modest pace of hiring, staffing firms continuing to be more bullish, and manufacturing firms reporting further job declines. On balance, prices continued to rise slightly over the current period; home prices, which had been essentially flat over the prior period, also rose slightly. Contacts appeared to be in more agreement than last period that current wage pressures had remained modest. On balance, firms continued to expect modest growth over the next six months.
Only two sectors of the Third District have reported changes in the direction or pace of their growth since the prior period. Manufacturers' reports improved from a slight decline to slight growth in general activity. In contrast, nonauto retail sales weakened further from a modest pace of growth to a slight decline in sales. The remaining sectors indicated no change compared with their prior performances, which ranged from a slight decline for auto sales to moderate growth for staffing services and lending volumes. Contacts from general services, tourism, commercial contractors, commercial leasing agents, and real estate brokers continued to report modest growth. Homebuilders continued to report slight growth.
Manufacturing
Contacts reported that overall activity has climbed into slightly positive territory since the prior Beige Book period; however, reports of shipments and new orders remained slightly negative. Firms also reported that the number of employees and the average employee workweek continued to fall. The makers of lumber products, fabricated metal products, and industrial machinery noted overall gains in activity from the prior period, while the makers of paper, primary metals, and electronic products noted weaker activity. However, these trends may be seasonal in nature, as they are similar to what these sectors noted during the same time period last year. Overall, contacts expressed somewhat lower expectations of growth during the next six months than during the last Beige Book period. The change in outlook was driven, in part, by lower percentages of firms expecting increases in shipments and new orders and higher percentages expecting a decrease in general activity than during the prior period. Expectations of future capital expenditures also fell, with fewer firms expecting increases and more expecting decreases.
Retail
Overall, nonauto retail contacts reported a slight decline in sales during the current Beige Book period, following modest growth during the prior period. At mall stores, the biggest decline in apparel sales in some time was accompanied by weak or declining sales in most other categories, including restaurants. Similarly weak results were reported for outlet stores. Convenience store operators noted that 20 days of rain in May hurt sales. While June sales were better, they observed some slowdown overall, which they attributed to competition, not less consumer spending. Generally, contacts expect modest growth to resume for overall retail sales through 2016.
Overall, Third District auto dealers reported that light vehicle sales slowed further during the current period but remain at high levels. More precise early period reports indicate that sales were lower than during the same time last year; anecdotal reports for recent weeks suggest sales will be flat, at best, with last year. Dealers are content with the relatively high sales numbers; however, they spoke of "managing the plateau" and of caution against overextending their businesses financially. Dealers still see growth potential in 2017.
Finance
Third District financial firms continued to report moderate growth of total loan volumes over the Beige Book period. Volumes within all lending categories have grown since the prior period, except for home equity loans. All categories except home equities and automobile loans grew at a faster pace than during the same period one year ago. The strongest growth during the current Beige Book period was for credit cards and automobile loans. Commercial real estate, commercial and industrial loans, mortgages, and other consumer lending grew modestly or slightly this year after declining slightly over the same period last year.
On balance, banking contacts continued to describe their loan portfolios as healthy and their customers' credit quality as slightly improving. Also, as before, they characterized the lending environment as competitive and expected mergers and acquisitions to increase. Contacts also continued to report riskier loans by competitors, but this was cited somewhat less often than during the previous period. Contacts generally described the wage and inflation environment as "pretty benign," with rising wage pressures for only some skilled positions. Contacts remained cautiously optimistic that slow, steady growth would continue through year-end.
Real Estate and Construction
Homebuilders reported that economic activity continued to rise slightly. Demand for new single family homes remains soft, and the lack of affordable land for lots hampers new development in suburban markets, while urban locations are attracting infill and redevelopment to meet greater demand for rental properties, ranging from affordable to upscale units. Builders noted some cost pressures for labor and as a consequence of new building codes in New Jersey; material costs pressures were less pronounced.
Brokers in the major Third District housing markets reported continued modest year-over-year sales growth. A major Philadelphia-area broker noted that sales appeared to be slowing somewhat because of the lack of inventory. Overall, home prices are rising slightly, although this varies somewhat across markets and price categories.
Nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported little change in the ongoing modest gains in construction activity and in leasing activity. A developer noted that demand for Lehigh Valley industrial/warehouse space is as great as it's ever been. Driven by e-commerce, these projects bring hundreds of new jobs and are creating upward pressure on $14 to $15 per hour wages. The City of Philadelphia office market also continues to tighten as vacancy rates continue to drop.
Services
Third District service-sector firms reported no significant change in their overall modest pace of activity. However, contacts noted small net overall declines in the pace of sales and new orders. One large national service-sector firm described some degree of weakness in its business, education, and health-care segments. Employment indicators were mixed, as contacts have noted higher full-time employment, similar part-time employment, and a lower average workweek since the prior period. Staffing firms reported continued moderate growth, including direct full-time placements, new temporary positions, and conversions to permanent positions. Tourism contacts continued to note modest growth, although interrupted by rain in May. June activity was strong again in the mountains, and parts of the shore experienced their best June in three years. Atlantic City casino revenues edged down again in May. Expectations for future growth in services remained about the same as the prior Beige Book period, with over half of service-sector contacts expecting activity to grow over the next six months.
Prices and Wages
On balance, price levels have continued to rise slightly since the previous Beige Book period. Over half of all contacts reported no significant changes in the prices they pay or in the prices received for their goods and services -- a somewhat lower percentage than last period. Of the firms that indicated a change, more noted increases than decreases. Bankers and staffing contacts reported little change in relatively modest wage pressures and relatively few labor shortages. Overall, contacts continued to report only modest wage pressure.