Beige Book Report: Philadelphia
September 12, 2018
Summary of Economic Activity
Aggregate business activity in the Third District continued at a modest pace of growth during the current Beige Book period. Likewise, employment sustained modest growth, but wages continued to grow moderately as the labor market remained tight. While manufacturers reported paying higher prices, other contacts reported no current shift in inflation trends, but many worried that tariffs would trigger future inflation. Nonfinancial services maintained a moderate pace of growth, but manufacturers reported a more modest pace than last period. Most consumer sectors continued at a modest pace. The construction and real estate sectors continued to issue mixed reports with declines in residential real estate sales and nonresidential construction, while contacts from new home construction and nonresidential leasing noted some growth. The growth outlook over the next six months remained positive, with over half of all firms anticipating increases in general activity.
Employment and Wages
Employment continued to grow at a modest pace during the current Beige Book period. Manufacturing and nonmanufacturing firms have reported ongoing net additions to staff since last period; more nonmanufacturers were hiring, but fewer manufacturing firms did so. Average hours worked rose further over the period for both manufacturing firms and nonmanufacturers.
Staffing firms continued to report incremental growth in job orders but ongoing difficulty attracting and retaining employees. One firm noted that temp-to-hire orders had increased, giving clients a three- to four-month trial, while avoiding recruiting and onboarding costs. Recruiting challenges prompted one restaurant--that was staffing up to enter the downtown Philadelphia market--to experiment with a storefront table taking job applications.
On balance, wage growth continued at a moderate pace. Once again, over half of the nonmanufacturing contacts reported increases in wage and benefit costs. Staffing firms reported no dramatic changes in wage trends; even in labor markets with the District's lowest unemployment rates, wages were said to "continue to inch up."
Price increases remained modest for most firms but were stronger for prices faced by manufacturers. Among nonmanufacturing firms, less than one-third reported increases for prices paid and for prices received--somewhat lower than in the prior period. One-third of the manufacturing firms continued to report increases in prices received for their own goods; however, more manufacturers paid higher prices this period, with nearly two-thirds noting increases. Bankers and other contacts cited labor shortages, wage pressures, and tariffs as concerns for spurring inflation, but none reported evidence of current inflation.
Looking ahead one year, firms' inflationary expectations for prices of their own goods and services have risen slightly from one quarter earlier, on balance; however, for manufacturing firms alone, inflationary expectations fell slightly. The firms reported higher expectations for overall consumer inflation.
Manufacturing activity slowed to a modest pace of growth--nearer to nonrecession averages than the moderate pace of the prior period. About 35 percent of the firms reported an increase in shipments and new orders, while over 20 percent of the firms reported decreases.
The makers of lumber products, chemicals, primary metals, and fabricated metal products tended to note gains in new orders and shipments; the makers of electronic machinery and industrial machinery reported mixed results. Nearly two-thirds of the firms that offered general comments noted that price hikes and/or supply disruptions had already occurred or were anticipated because of tariffs and the threat of tariffs. For those firms already impacted, contacts often cited double-digit price increases; some typical responses were that tariffs "have put us out of business" on certain products and "are a cloud on every facet of our business planning."
On balance, manufacturing contacts continued to expect general activity to increase over the next six months. The percentage of firms expecting future increases edged above 50 percent; however, the percentage of firms expecting decreases also edged upward. The firms' outlook for future employment and future capital expenditures remained nearly the same, with just under 40 percent expecting increases.
Nonauto retailers continued to report modest sales growth in July and August, citing rising consumer demand and stable gas prices. Ongoing price sensitivity by consumers continued to be met by heavy promotional discounting. Retailers noted rising costs for land development and freight but no direct impacts from tariffs.
Auto dealers in New Jersey and Pennsylvania reported year-over-year sales that had essentially matched levels from the summer of 2017. Likewise, year-to-date sales appear to be holding even with 2017's high levels. Dealers continued to worry about rising interest rates.
Tourism contacts continued to report modest growth overall. One analyst noted that there was a slowdown in travelers from China and that U.S. households have been funding travel from savings--a trend deemed unsustainable. A shore hotelier reported very high traffic but low spending rates at restaurants and shops. Two recent casino (re)openings appear to have lifted all Atlantic City casinos in June; however, July reports suggest the new entrants are primarily extracting market share. Internet and sports gambling has extended the New Jersey market a bit, even as neighboring states begin to compete on the same platforms.
On balance, service-sector firms continued to report moderate growth in general activity. The percentage of firms reporting increased sales rose over 50 percent, while the percentage reporting increased new orders fell but remained above 40 percent. One firm noted its "best accounts receivable in the last decade." Expectations of future growth narrowed slightly, but still nearly two-thirds of the firms anticipated increased activity.
Financial firms continued to report modest growth in overall loan volumes (excluding credit cards)--a slightly slower pace than during the same period last year. Volumes grew moderately in mortgages and in other consumer loans (not elsewhere classified) and grew modestly in commercial real estate lending and in auto loans. However, these gains were offset by slight declines in home equity lines and in commercial and industrial lending. Compared with one year earlier, loans grew modestly and in all categories except for home equity lines.
During the current period, credit card lending grew at a modest pace--comparable with the same period last year for this highly seasonal measure. Credit card lending has also grown modestly over the entire year.
Banking contacts noted ongoing challenges from "overly" competitive loan terms and bank deposit rates but generally cited greater business optimism and growing loan demand. The bankers also reported no signs of credit quality deterioration.
Real Estate and Construction
On balance, homebuilders reported slight growth in new contracts but little change in construction activity. Sales of existing homes continued to decline moderately compared with the same period last year. However, as the period progressed, sales began to rise a bit in a few markets, despite ongoing low inventories.
Overall, rents continued to rise in the slowly growing nonresidential real estate market, especially for offices and industrial warehouses. Higher office rents have been driven, in part, by outside investors, then partially offset by concessions, while underlying demand continued to support new construction and rising rates for warehouses. On balance, nonresidential construction activity continued to slowly wane in most markets.
For more information about District economic conditions visit: www.philadelphiafed.org/research-and-data/regional-economy