Beige Book Report: Philadelphia
October 19, 2016
Aggregate business activity in the Third District continued to grow slightly during the current Beige Book period. Most contacts reported slight increases in hiring with some exceptions; staffing firms indicated modest increases, while manufacturers continued to report declines. On balance, prices continued to rise slightly over the current period, as did home prices. Contacts reported that wages continued to rise modestly but noted more upward pressure for some skilled positions. Overall, firms continued to expect moderate growth over the next six months.
Third District contacts reported moderate growth for lending volumes; modest growth for general services, staffing services, and tourism; and slight growth for manufacturers and commercial leasing agents. Little or no change in activity was noted by auto dealers, nonauto retailers, residential homebuilders and brokers, and commercial contractors. Since the prior period, two sectors improved a bit, while growth in two sectors slowed, as noted in their respective sections below.
Manufacturing
On balance, contacts reported that overall activity grew slightly--following little growth during the prior Beige Book period. Reports indicated that general activity and new orders increased, while shipments fell. The makers of paper products, fabricated metal products, and industrial machinery and equipment noted overall gains in activity from the prior period, while the makers of lumber, chemicals, primary metals, and electronic equipment noted weaker activity. Firms continued to report overall decreases in the number of employees and average employee work hours. Contacts remained optimistic about growth over the next six months but expressed somewhat lower expectations for general activity and future capital expenditures. Expectations for future employment improved.
Retail
Overall, nonauto retail contacts reported little change in sales during the current Beige Book period, similar to the prior period. Outlets reported that sales were flat to up slightly and noted deeper discounting and promotional spending by retailers, while a mall operator reported a pickup in traffic and apparel sales following a disappointing back-to-school season. Convenience store operators have reported steady growth since the last Beige Book period but a slowdown in growth compared with last year, which they attributed in part to record-high sales and traffic this time last year. Contacts remain cautious but still expect modest growth for overall retail sales through 2016.
Light vehicle sales in the Third District remained at high levels and held mostly steady this period. While sales were flat to slightly down over the year, dealers continued to expect total 2016 sales to be at or above the 2015 level. Contacts in New Jersey also noted high inventories, which could spur sales through model year sell-offs.
Finance
Third District financial firms continued to report moderate growth of total loan volumes over the Beige Book period. Volumes within all major lending categories have grown since the prior period. Commercial and industrial (C&I), credit card, and other consumer 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 card debt, C&I loans, automobile loans, and other consumer lending. Mortgage lending and home equity loans were up slightly during the period but have declined since last year.
On balance, banking contacts continued to report healthy loan portfolios and improving customer credit quality. As before, most contacts indicated that their loan standards were unchanged for most loan categories. A few contacts continued to express concerns about riskier loans by their competitors, particularly for multifamily projects. Many continued to characterize the lending environment as competitive. Contacts noted that while some businesses are making investments, others are choosing to defer capital investments for the time being. Banking contacts remained cautiously optimistic that slow, steady growth would continue.
Real Estate and Construction
Homebuilders reported little change in activity during the current Beige Book period, down from the slight rise reported in the last period. Builders attributed some of the slowdown to a seasonal lull similar to what they experienced last year. Contacts indicated they began to see improvement toward the end of the period and expect activity to pick up in 2017. One banker noted concern over whether multifamily activity in the Philadelphia market is overheating, and one major developer recently backed out of a large Center City project, citing rising construction costs and slowing rent growth.
Brokers in most major Third District housing markets noted that existing home sales activity have improved slightly since the prior period. However, a major Philadelphia-area broker continued to report that a low inventory of homes was constraining sales, particularly homes in the mid-price range. Home prices continued to rise slightly, although this varies across markets and price categories.
Nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported that construction activity remained steady at healthy levels. Leasing activity improved for industrial space, particularly warehouses, but slowed somewhat for suburban office space. Contacts expect continued growth and demand for industrial growth remains very strong.
Services
Third District service-sector firms reported overall modest activity this period--a slight slowdown from the moderate pace reported in the previous Beige Book. Contacts also noted slower growth in the pace of sales and new orders. Since the prior period, employment indicators have shown improvement, as contacts noted increases in full-time workers, decreases in part-time hires, and no change in workweek hours. Reports from staffing firms continued to reflect modest growth, with a central Pennsylvania firm noting more activity in executive hiring. Expectations for future growth in services have improved since the prior Beige Book period, with a higher percentage of service-sector contacts expecting growth over the next six months.
Tourism contacts generally indicated a continuation of modest growth overall. Hotel revenues in the broader Philadelphia market exceeded last year's revenues for the first time this year, following a strong convention calendar through September as well as robust leisure travel. Along the shore, activity has improved since last period because of better weather conditions, and some shore contacts reported that this was a stronger year than last year. Atlantic City casino revenues have improved slightly since last period but still showed little sign of strengthening. A banking contact noted that while remaining casinos are starting to fare better against the competition, revenues have been buoyed by online gaming.
Prices and Wages
Price levels have continued to rise slightly, on balance, since the previous Beige Book period. Similar to the prior period, most contacts reported no significant changes in the prices they paid or received for their goods and services; however, of the firms that reported a change, more firms noted price increases than decreases. Commercial real estate contacts attributed an escalation of construction costs primarily to rising labor costs but indicated no concern about inflation. Some skilled positions are commanding higher wages, but contacts continued to report modest wage pressures, overall.