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Philadelphia: November 2019

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Beige Book Report: Philadelphia

November 27, 2019

Summary of Economic Activity
Aggregate Third District business activity continued at a modest pace of growth during the current Beige Book period. Growth rates slowed from the prior period to a modest pace in manufacturing and nonauto retail sales, and to a slight pace for tourism. Financial services continued to grow at a moderate pace; nonfinancial services grew at a modest pace. Construction activity for residential and nonresidential buildings continued to hold steady, as did commercial leasing activity. Sales of new autos and of existing homes continued to decline – at a slight and a moderate pace, respectively. Labor markets tightened further throughout the District. Wages continued growing moderately, but employment growth appeared to slow to a slight pace. Overall, price pressures remained modest. The firms' outlook for growth over the next six months remained positive, with about half of all firms anticipating increases in general activity. Most contacts expected current business conditions to continue through 2020 but remained cautious in their planning.

Employment and Wages
Employment grew slightly during the current Beige Book period – a slower pace than in the prior period. About two-thirds of the firms reported no change in staff. While the share of manufacturers reporting a higher number of employees rose, the share among the much larger nonmanufacturing sectors fell. Average work hours continued to edge down since the prior period.

The firms continued to report very tight labor market conditions. Staffing firm contacts all noted challenges to hiring, as the labor shortages continued to constrain placements. One staffing contact also reported that order activity was down; another noted that orders had been delayed, after which clients were trying to catch up with production – necessitating added incentives to attract workers for overtime. Another staffing firm noted pressure from a client seeking contact concessions in order to absorb some of the cost of tariffs on the firm's products.

Wage growth continued at a moderate pace. While the overall pressure appears to have eased slightly, contacts noted specific pressures at lower wage rates. One staffing firm reported more difficulty recruiting for firms that only offered minimum wage, and another indicated that a different staffing firm was deploying yard signs to recruit for jobs paying $16 an hour. The share of nonmanufacturing contacts who reported increases in wage and benefit costs ticked up to 44 percent; just 2 percent reported decreases.

On balance, the firms continued to report modest increases for both input prices and prices received for their own goods and services. The share of firms reporting increases in prices fell for both manufacturing and nonmanufacturing firms; generally, the share reporting decreases in prices rose. About two-thirds of the firms reported no change in prices over the period.

Looking ahead six months, the anticipation of higher prices was less widespread among manufacturers than last period. The percentage of manufacturing firms that expect higher prices fell, while the percentage expecting lower prices rose. This was true for prices firms expected to pay as well as for prices firms expected to receive for their own goods.

On balance, manufacturers reported modest growth in activity – somewhat slower than the moderate pace reported during the prior period. Nearly twice as many firms reported increases in shipments and new orders than reported decreases; however, the percentage reporting increases rose to about one-fifth of all firms that reported.

The growth was broadly shared, as the makers of lumber products, paper products, chemicals, primary metal products, fabricated metal products, and industrial machinery all tended to note gains in new orders and shipments.

Comments were mixed. A couple of primary metals firms reported positive trends, but the firms from several other sectors noted weakening orders, competitive business lost as a consequence of tariffs, and production constraints for lack of labor.

Manufacturers' expectations of activity over the next six months were mostly unchanged. Expectations of shipments and of new orders edged higher, remaining above long-term nonrecession averages. Expectations of future employment fell, while planned capital spending rose.

Consumer Spending
Contacts for malls and convenience stores reported modest growth in nonauto retail sales – a return from the somewhat faster pace during the prior period. Mall store operators reported solid year-over-year sales growth. Convenience store contacts suspected a little economic softness underlying a slight tick down in their positive rate of sales growth, although weather may have also been a factor.

Auto sales continued to edge lower but remained near high levels. Pennsylvania dealers noted positive year-over-year sales in October, while New Jersey dealers reported slight growth in October following a weak September. Year-over-year sales growth through October year to date remained positive in both states, holding steady in Pennsylvania but flattening out slightly in New Jersey.

Tourism activity appeared to grow at a slight pace – a bit slower than in the prior period. A tourism analyst noted that demand for hotels in downtown Philadelphia remained positive but slowed on a year-over-year basis, similar to national trends. Atlantic City casino revenues slowed from the prior period and were down slightly, on balance.

Nonfinancial Services
On balance, activity at service-sector firms continued at a modest pace of growth. The percentage of firms reporting increases in new orders nearly doubled, and the share of firms reporting increases in current revenues edged higher. Over 55 percent of the firms – more than in the prior period – expect growth over the next six months.

Financial Services
Financial firms continued to report moderate growth in overall loan volumes (excluding credit cards) on a year-over-year basis, although the rate seemed to edge slightly slower. Credit card lending held steady at a moderate pace.

During the current period (reported without seasonal adjustments), volumes appeared to grow moderately for home mortgages, modestly for automobile loans, and slightly for other consumer loans (not elsewhere classified). Commercial real estate and commercial and industrial loan volumes declined slightly, while home equity lines decreased moderately.

Banking contacts continued to report no significant problems with loan delinquencies. Contacts also noted ongoing uncertainty that is slowing business decision-making and constraining the willingness to invest. However, most banking contacts remain cautiously optimistic about continued growth through 2020.

Real Estate and Construction
Homebuilders reported little change in contract signings in the current period, on balance. One South Jersey builder reported two strong months of sales in the active adult market, noting positive feelings about the coming year but a plan to be conservative.

Existing home sales continued to decline moderately on a year-over-year basis across most local markets, with exceptions of moderate growth in the Jersey Shore and Harrisburg areas. A large Philadelphia-area broker indicated continued inventory constraints heading into a seasonal lull for home sales.

On balance, commercial real estate construction and leasing activity seemed to hold steady at relatively high levels. Contacts reported continued strength in the industrial market, with ongoing demand for new construction. Most contacts also noted a positive quarter for office space leasing, which may spur demand for new construction in the future. Management firms continued to note positive net absorption, falling vacancy rates, and rising rents in many office and industrial segments.

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