Beige Book Report: Philadelphia
November 30, 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 reported declines. On balance, general price increases picked up to a modest pace over the current period, while home prices continued to grow at a slight pace. Contacts reported that wages continued to rise modestly and generally noted a tightening of the labor market. Overall, firms continued to expect moderate growth over the next six months.
Third District contacts reported moderate growth for lending volumes, and modest growth for general services, staffing services, and tourism. Slight to no change in activity was noted by manufacturers, auto dealers, nonauto retailers, and all residential and nonresidential real estate sectors. The only notable shift in activity was a reported lull in the growth of nonresidential leasing activity from a prior period of slight growth.
Manufacturing
On balance, manufacturers described a slight, ongoing expansion of overall activity, although 60 percent of the contacts reported no change. Contacts reported greater increases in new orders and shipments than during the prior period. In addition, current inventories grew for the first time in over a year. The makers of paper products, chemicals, primary metal products, and industrial machinery and equipment noted overall gains in activity from the prior period, while the makers of lumber, fabricated metals, and electronic equipment noted weaker activity. Firms noted that the ongoing decline in employment continued, albeit slightly, while the average hours worked grew this period, after falling for over half the year. Contacts remained optimistic about growth over the next six months, and expectations for future capital expenditures increased. However, firms expressed somewhat lower expectations for general activity and future employment.
Retail
Overall, nonauto retail contacts continued to report little change in sales during the current Beige Book period. Gardening supplies sold well throughout the late summer/early fall season. Outlets reported that sales were up slightly during the period and noted that apparel sales did unusually well over the Veterans Day weekend. For some stores, the Black Friday sales have already begun with deep discounts now and slightly deeper discounts promised later.
Light vehicle sales in the Third District were broadly described as plateauing at high levels. Sales figures have bounced around a bit from month to month, but year-over-year growth has averaged about 1.0 percent for the first ten months of the year. While dealers' operations have stayed relatively lean, they are beginning to look at cutting back expenses, including personnel.
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 continued to grow, except credit card volumes, which leveled off -- a typical seasonal trend prior to the significant growth expected through the holiday season. Commercial and industrial (C&I) loans and commercial real estate (CRE) loans grew at a slower pace than during the same period one year ago but were two of the fastest growing loan categories recently, along with other consumer lending. Auto loans, mortgages, and home equity loans were up slightly during the period, but volumes in the latter two categories remained slightly below last year's volumes.
On balance, banking contacts continued to report healthy loan portfolios and improving customer credit quality, although a few are starting to see scattered problem loans emerge. Several contacts expressed concerns about a potential overheated housing market, primarily for multifamily development in larger urban areas. In addition, a few banks have tightened credit standards since last period -- primarily for C&I lending and CRE. Overall, banking contacts continued to express cautious optimism for slow, steady growth.
Real Estate and Construction
On balance, homebuilders continued to report little change in activity during the current Beige Book period. While contacts also reported few immediate cost increases, they did note that ongoing incremental cost increases for land, development, materials, labor, and financing have been rising faster than new home values, which creates barriers to delivering affordable new homes. Qualified entry-level buyers are also hard to find, thus the strength of the single-family market is in high-end housing.
Brokers in most major Third District housing markets continued to report slight growth of existing home sales, and sales continue to be constrained by low inventories of available homes. Home prices also continued to rise slightly, although this varies across markets and price categories. A major Philadelphia-area broker revealed no meaningful change in the firm's outlook for home sales in 2017.
Nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported that construction and leasing activity remained steady at healthy levels, which represents a bit of a lull in leasing growth compared with the prior period. However, demand has grown incrementally over many years, such that rents and cranes have risen and contractors remain busy, especially for office space and multifamily housing in urban areas, and warehouse space along the interstate corridors.
Services
On balance, Third District service-sector firms continued to report modest activity. Similarly, contacts also noted continued modest growth in the pace of sales and new orders. Since the prior period, employment indicators have shown improvement, as contacts have reported nearly steady use of full-time workers, increases in part-time hires, and an increase in workweek hours. Expectations for future growth in services remain very positive; however, they have fallen somewhat since the prior Beige Book period.
Tourism contacts generally indicated a continuation of slight to modest growth against high levels from the prior year. Pleasant fall weather helped hotels throughout the District maintain high occupancy rates and boost room rates. Mountain resort areas reported strong bookings for the remainder of the year, while convention bookings are reported as strong for the first quarter of next year. Atlantic City remains a weak spot, as recent casino revenues continued to decline against prior year levels.
Prices and Wages
Price levels rose modestly, on balance, a bit more than during the previous Beige Book period. Most contacts reported greater increases in the prices they received for their goods and services; manufacturers also noted an increase in prices they paid. Looking ahead one year, manufacturers anticipate a 2.0 percent increase in prices received for their own goods and services, and nonmanufacturers expect a 2.8 percent increase. Manufacturers also reported expectations of 2.3 percent annual inflation for consumers, while nonmanufacturers expect 2.0 percent inflation.
On balance, wage pressures continued to be modest, according to banking and staffing contacts, with more pressure for certain skilled positions and for nonskilled labor in certain geographic markets. One staffing firm noted that wage pressures were becoming more broad based. Generally, staffing firms reported that labor markets were tightening, while overall growth of hires remained modest. Staffing contacts noted that they are getting less pressure from their client firms to keep wages down; firms are accepting increases in order to attract talent. Over the next year, most firms expect their own compensation costs per employee (wages plus benefits) to rise 3.0 percent.