The following is the text of the Federal Reserve Board’s Third District -- Philadelphia.
Since the last Beige Book, Third District economic activity has continued to grow at a very slow rate. Overall, manufacturing growth has leveled off at a low rate since the last Beige Book. Retailers posted strong year-over-year sales increases in June. For motor vehicle dealers, the slowdown in sales that began in May eased slightly further in June. On balance, bank lending has been mostly flat since the last Beige Book. Steady and falling house prices continue to dampen sales of existing and new homes, according to residential real estate and construction contacts. Commercial real estate contacts reported small improvements in market conditions since the previous Beige Book. Slight increases in activity were reported by service-sector firms, dampened somewhat by a hiring slump among customers. Price pressures from food, energy, and other commodities continue to affect many sectors. The ability to pass along costs remains mixed, and there is little evidence of wage pressure.
Third District business contacts continue to expect slow growth despite expressing increased uncertainty. Manufacturers forecast a modest rise in shipments and orders during the next six months. Retailers remain cautiously optimistic about future sales; auto dealers are more agnostic. Bankers expect slight growth in lending, at best. Residential real estate contacts are generally planning for a continuation of slow growth, comparable to last year. Contacts in commercial real estate continue to expect modest gains. Service-sector companies also expect continued slow growth.
Since the last Beige Book, Third District manufacturers reported a lull in the growth of new orders and a slowdown in the modest growth rate of shipments. However, activity was reported to be a bit stronger in July. Among key manufacturing sectors in the Third District, the number reporting increases of both shipments and orders has narrowed since the last Beige Book. Growing product demand was reported by makers of furniture; instruments; stone, clay, and glass products; and printers and publishers. However, makers of food, apparel, chemicals, rubber, primary metals, fabricated metals, and electronics reported declining product demand. Comments from firms were mixed, with several citing an ongoing lull in customer demand, a few surprised by unseasonal increases, and many concerned by economic uncertainties.
Despite the uncertainties, Third District manufacturers have grown somewhat more positive in their outlook for business conditions over the next six months compared to the time of the previous Beige Book. Among firms contacted, over two-fifths expect increases in new orders and shipments, while about one-fifth expect decreases. One-third of firms polled project increases in capital spending over a six-month planning horizon - the same proportion as at the last Beige Book.
Third District retailers reported stronger sales in June than a year earlier. Shopping trips and a willingness to spend were aided by falling gas prices since the previous Beige Book. Consumers continue to search for value, and retailers continue to respond with merchandise at lower price points. Retailers remain cautiously optimistic as the critical September through December retail period approaches. However, given the slow growth so far this year, one retailer indicated that it would likely implement only half of this year’s capital budget plan.
Third District auto dealers generally reported that sales eased further in June after May’s slowdown. Results varied by brand, depending on reliance on Japanese production for the vehicle or parts. One dealer of General Motors brands indicated June was the dealership’s best month of the year. Dealers remain uncertain about future sales.
Third District banks contacted in July indicated little change in loan volumes outstanding. Many sources reported continued weak demand from small businesses; some bankers cited stronger lending to middle market businesses. Revolving credit had bounced back somewhat in June, after a fall-off in April and May; however, the gains may have been lost in early July. On balance, total credit extended by banks in the region has been flat to slightly down. Expectations for better growth were not met for the most recent period - dampening expectations for anything but the slightest improvement in the near future, according to banking contacts.
Real Estate and Construction
Residential real estate activity in the Third District has changed little since the previous Beige Book. While some agents reported positive comparisons during June and early July for showings and sales compared to year-ago levels, activity last year was soft after the tax credit expired. Agents and builders continue to report stronger sales among mid- and low-priced homes, but incidences of high-priced home sales are increasing. Reports of multiple offers for condos in center city Philadelphia were noted by one agent as a glimmer of improvement. Most market participants do not expect the year as a whole to be markedly different from last year. In most parts of the Third District, sale prices of existing homes continue to fall slightly; in a few areas, prices were unchanged. Traffic and sales of new homes have weakened since the last Beige Book; however, one builder reported an uptick in activity in Pennsylvania in the last two weeks.
Commercial and industrial real estate contacts have noted small improvements in the Third District since the previous Beige Book. Overall, vacancy rates have improved for office space, industrial space, and apartments, although one manager said activity seems to have come to a standstill in the last month. Retail space vacancies may have edged up slightly; however, demand is stronger in regional centers and weaker at neighborhood sites. An ongoing trend of trading up for quality as office space leases renew has lowered vacancies and reduced concessions for Class A space, while raising vacancies for Class B space. Rents are generally steady for most sectors in most areas and concessions remain common.
Reports from Third District service-sector firms were slightly positive overall, but firms described various challenges. A recurring theme was a recent slowdown in hiring, especially from small and medium-sized businesses. One staffing agency described “almost a stop to new [excludes replacement] hiring orders in the last three weeks.” Other firms cited projects delayed due to ongoing economic uncertainties, including government-related projects contingent on budget negotiations. The most positive firms recognized that the “easy year-over-year comps are over” in this recovery and that continued growth will be slow. Despite these challenges, most service-sector firms expect growth to be somewhat better over the next six months.
Prices and Wages
Since the previous Beige Book, the percent of manufacturers reporting increases in prices paid for inputs dropped from more than one-half to one-third. Over the same period, the percent reporting decreases in prices received for their own products rose from nearly zero to over one-sixth. Rising commodity prices continue to pressure retailers, service-sector firms, and home builders to pass through costs when they can and to lower the price-point of their offerings. There are a few reports of a little upward pressure on rents in selected local markets for apartments and some retail space. Meanwhile, there is little evidence of pressure on wages.