January 18, 2023
Summary of Economic Activity
On balance, business activity in the Third District appears to have declined slightly after holding steady since the first of July. Inflation and higher interest rates have dampened consumer demand for big-ticket items, including homes and autos. Employment continued to grow slightly even as labor demand eased; business contacts noted an increased willingness to work. Wage growth and inflation continued to subside (and reported price increases were less widespread), but both continued at a moderate pace. Overall, firms continued to note less difficulty in hiring and fewer supply chain disruptions. On balance, expectations for economic growth over the next six months improved slightly among all firms; however, expectations remained well below their nonrecessionary historical averages.
Labor Markets
Employment continued to grow slightly, with small net increases among nonmanufacturers outweighing small net decreases among manufacturers. Some firms reported that they will reduce their temporary staffing first as their own production slows. Staffing firms have also noted some softness in demand for temporary workers. Contacts, including staffing firms, also noted that hiring has become easier, with some suggesting that workers are beginning to feel the need to be employed full time.
Still, nearly all firms continued to describe staffing as their primary challenge. Many firms noted a high degree of job churn, which results in workers being hired into new industries for which they have no prior experience. Several contacts noted that some professional staff had left for higher salaries but then sought to return after experiencing their new firm's work environment. Firms continued to report that wage growth had subsided but remained in a moderate range. Wage inflation remained pervasive. In our monthly surveys, the share of nonmanufacturing firms reporting higher wage and benefit costs per employee remained at a little over 40 percent, while just over half of the firms reported no change and a few reported lower compensation levels. Most contacts expect future wage growth to return to near pre-pandemic rates.
Prices
On balance, inflation continued to rise moderately, although reported increases were less widespread. Two-thirds of manufacturers reported no change in prices paid (for factor inputs) and almost two-thirds of nonmanufacturers reported no change in prices received (often from consumers). Moreover, the share of firms reporting increases less the share reporting decreases was at or below its nonrecessionary average for the difference between these two categories. Price increases were more commonly seen in the exchanges between firms for intermediate goods.
Most contacts noted that prices were easing overall; however, most could also cite examples of price spikes for one or more production inputs. On balance, contacts also noted fewer supply chain disruptions, although some persist.
About half the manufacturing contacts expected to pay higher prices over the next six months, and slightly less than that expected to receive higher prices for their own goods.
Manufacturing
Manufacturing activity declined moderately – after having declined modestly in the prior period. The index for new orders fell further and was negative for the seventh consecutive month. In addition, the shipments index turned negative, suggesting that firms have begun to work through their backlogs. Many contacts confirmed that demand was slowing, backlogs are being fulfilled, and companies are reducing their inventories. One firm that reported strong sales indicated that it was gaining market share from failing competitors, not economic growth.
Manufacturers expect the current slowdown to be relatively brief. The indexes for future activity and new orders trended higher and turned positive; the index for future shipments remained positive and trended higher. Moreover, expectations of increased employment and capital spending over the next six months became more widespread.
Consumer Spending
Retailers (nonauto) and restaurateurs offered mixed reports: A low-cost retailer reported that falling gas prices had driven stronger sales in December, but a high-end retailer exclaimed that "December is not happening!" A restaurant operator noted progressively weaker traffic from diners (on a year-over-year basis) each month this autumn into December.
Low-income households expressed challenges in making their incomes stretch through the month. After requests for housing and utility bills, assistance with employment and income was the third-highest overall request for help on 211 calls in the three-state region. This was also true for New Jersey, individually, but in Delaware and Pennsylvania, food assistance rose to the third-highest request at 10 percent of all requests.
Auto dealers reported modest declines in sales – noting that high prices, rising interest rates, and smaller year-end bonuses had dampened demand. New car prices had begun falling as inventory levels improved; however, a contact reported that most car manufacturers are scaling back production again as chip shortages are expected to continue through the first quarter, or later.
Tourism contacts reported that demand for lodging was falling slightly in most of the region. Consumers are still taking trips but are booking shorter stays, resulting in softness during the week. According to one contact, the pipeline for new hotel construction "has fallen precipitously." With an expectation of little new supply over the next three to five years, room rates are expected to increase, while upward pressure on labor compensation is expected to ease.
Nonfinancial Services
On balance, nonmanufacturing activity appeared to hold steady for the second consecutive period; however, the share of firms reporting decreases in sales and new orders slightly edged out the share reporting increases.
Financial Services
The volume of bank lending (excluding credit cards) grew moderately during the period (not seasonally adjusted) – comparable with growth in the prior period and faster than in the same period last year. However, growth was less widespread, especially among some consumer segments. Inflationary effects on home prices and other big-ticket items continued to boost loan volume growth during the current year relative to past years.
During the period, District banks reported strong loan volume growth in home mortgages and commercial and industrial lending and modest growth in commercial real estate lending. Home equity lines, auto loans, and other consumer lending were essentially flat. Credit card volumes grew robustly – typical of the holiday season.
Real Estate and Construction
Homebuilders continued to report weak demand and a modest decline in contract signings for new homes. Some smaller builders are able to maintain steady work by offering price concessions or by offering new lower-priced products with a smaller footprint and less costly features.
Existing home sales fell modestly in most markets – following a steep decline in the prior period. Brokers noted that the softer market is shifting (slowly) back toward a balance between buyer and seller. Days on the market are lengthening, and home inspections are becoming the norm again. However, housing affordability worsened.
Requests for assistance with housing and utility bills continued to dominate the share of 211 requests in the three-state region, at 32 percent and 23 percent, respectively. In turn, 42 percent of the housing requests were for rental assistance.
Market participants in commercial real estate continued to report steady current construction activity, although the pipeline is less full. Many contacts noted that higher interest rates, tighter credit, and current market uncertainty have delayed many deals, especially for land development. Demand remains strong for new space to serve industrial, warehousing, and the life sciences sector. Multifamily housing has begun to slow, and sentiment toward office space is turning increasingly dour. Leasing activity for office space has slowed modestly, and renewals are often seeking less space.
For more information about District economic conditions visit: https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis