January 18, 2017
Summary of Economic Activity
Aggregate business activity in the Third District grew at a modest pace during the current Beige Book reporting period--a bit faster than the prior period. Notable shifts in activity included nonfinancial services and existing home sales, which improved to a moderate pace of growth. Four sectors--nonauto consumer spending, manufacturing, and nonresidential construction and leasing--improved to a modest pace of growth. Employment growth also picked up to a modest pace. This pickup included manufacturing firms, which had been reporting job losses for much of the year. Contacts continued to report that wages rose modestly as the labor market continued to tighten. On balance, general prices also continued to grow at a modest pace. Overall, firms continued to expect moderate growth over the next six months.
Employment and Wages
Employment has picked up notably to a modest pace of growth since the prior report. Manufacturing firms noted an increase in employment for the first time in a year, while average hours worked lengthened for the second consecutive month. Employment indicators from nonmanufacturing firms improved, as contacts reported increases in the use of full-time workers and part-time hires and in workweek hours.
However, descriptions from staffing firms were mixed, with Pennsylvania firms noting some quieter-than-normal lulls around the holiday season, while a New Jersey firm reported finishing strong through year-end.
On balance, wage pressures continued to be modest although the labor market has tightened for many occupations, according to banking and staffing contacts. One staffing contact described the labor market as tightening, with wages trending up and more turnover in mid-market placements; the contact also noted that small businesses will have to raise wages to remain competitive. Manufacturing contacts estimated that wages and nonhealth benefits would increase 2.0 percent to 2.5 percent in 2017 and that total compensation, including health benefits, would rise 3.5 percent to 5.5 percent.
Prices
On balance, price levels continued to rise modestly. Although about 70 percent of the firms reported no change at all in prices paid and prices received, more of the remaining firms reported increases than decreases. The differential was similar to last period for prices paid but diminished for prices received.
Retail analysts used the term "price deflation" to depict the deep discounting of many retailers throughout the holiday sales period. Overall, home prices continued to rise slightly, although this varies across markets and price categories. Both residential and commercial developers have noted the high cost of developable land.
Manufacturing
Overall, manufacturing firms reported modest growth--noting improvements in general activity and shipments, for which over one-third of the firms reported increases. New orders also continued to grow, but with somewhat fewer firms noting increases compared with the prior period.
The makers of paper products, chemicals, and primary metal products noted overall gains in activity from the prior period, while the makers of lumber products noted weaker activity. Fabricated metals, industrial machinery, and electronics firms reported mixed results.
More than half of the manufacturing contacts were optimistic that orders, shipping, and general activity would grow over the next six months. Firms also expressed broader optimism for future capital expenditures and employment.
Consumer Spending
Nonauto retail sales grew modestly over the holiday sales period, according to several analysts. They also noted that retailers offered heavy discounts on many items even before Black Friday and maintained these bargains throughout the season. Our contacts anticipate that while some retailers succeeded in clearing their shelves and creating the opportunity to restock with new inventory, they may have constrained their profits. Customers were described as "more savvy with technology" and as spending more money per trip.
Auto dealers described light vehicle sales as holding steady at high levels through year-end. Annual sales figures were estimated to finish slightly above those of 2015. For New Jersey, this meant a second consecutive sales record. Generally, dealers do not expect an increase in 2017 but hope sales will remain at or near 2016 levels.
Tourism contacts generally indicated a continuation of modest growth relative to the high levels of the prior year. Philadelphia area hotels set records for a third consecutive year. A shore location contact boasted an all-time record December--the third record month in the past year. Mild winter weather helped boost traffic at shore locations over the holidays, filling restaurants and retail shops. However, casino revenues in Atlantic City continued to decline against prior-year levels.
Nonfinancial Services
Overall, Third District service-sector firms reported that activity picked up to a moderate pace of growth. Contacts also noted that the pace of sales and new orders improved. However, reported expectations of future growth have outpaced reports of current growth, though falling shy of many other reports over the past six years.
Financial Services
Third District financial firms reported modest growth of total loan volume, a bit off the moderate pace of the prior Beige Book period. However, the significant seasonal increase in credit card volumes anticipated for the recent holiday period was much larger in 2016 than in 2015.
Commercial real estate loans and commercial and industrial loans continued to be two of the fastest growing loan categories; however, both grew at a slower pace than during the same period one year ago. Volumes of home mortgages, home equity loans, auto loans, and other consumer loans were mostly unchanged over the current Beige Book period.
On balance, banking contacts continued to report healthy loan portfolios and improving customer credit quality. In addition, several contacts noted holding the line on their own credit standards against more lenient terms and conditions offered by competitors.
Several contacts noted that the recent optimism and enthusiasm expressed by Main Street firms and Wall Street investors have not yet translated into tangible business investment. Overall, banking contacts continued to express cautious optimism for slow, steady growth, and are not yet convinced of potentially greater growth.
Real Estate and Construction
On balance, homebuilders continued to report little change in activity. However, reports were mixed: Pennsylvania builders of mid-priced homes noted a pause in activity, while a South Jersey builder of higher-priced homes reported a pickup at year-end with strong backlogs going into January.
Brokers in most major Third District housing markets reported an upsurge in home sales to a moderate pace but noted that this season accounts for a relatively low percentage of annual sales volume. Moreover, sales continued to be constrained by very low inventory levels.
Nonresidential real estate contacts covering much of the Third District reported that slow, steady incremental growth was supporting leasing (and pre-leasing) activity, falling vacancy rates, rising rents, and new construction. Industrial/warehouse space is in greatest demand throughout the District. The market for office space is tightest in Philadelphia's central business district, while most suburban office markets are still strengthening.