The following is the text of the Federal Reserve Board’s Third District--Philadelphia.
Aggregate business activity in the Third District has continued to grow slowly since the previous Beige Book, although the pace of growth has shifted in a few sectors. Manufacturing activity declined further, but the rate of decline is tempering. Retail sales have grown somewhat faster than was the case at the time of the last Beige Book, while auto sales have continued to increase at a consistent pace. Lending volumes at Third District banks have continued to grow steadily, and credit quality has continued to improve since the last Beige Book. Demand for new home construction grew at a slightly faster pace than during the previous Beige Book period, and brokers report steady growth in sales of existing homes. Commercial real estate contacts report more widespread growth, but overall demand remains modest. On average, service-sector firms report more flattening of growth. Price pressures have changed little in most sectors since the last Beige Book.
The overall outlook appears slightly less optimistic relative to the views expressed in the last Beige Book, as contacts expressed uncertainty about the presidential election and the fiscal policy decisions to follow. Expectations among manufacturers, while still positive, have fallen further for overall activity, anticipated hiring, and capital spending plans over the next six months. Retailers, auto dealers, financial firms, and other service-sector firms remain positive about the near-term outlook but are increasingly cautious due to their customers’ rising uncertainty. Real estate firms remain slightly more optimistic with broader participation.
Manufacturing. Since the last Beige Book, Third District manufacturers have continued to report overall declines in shipments and new orders; however, the weak demand was less widespread. Makers of lumber and wood products; stone, clay, and glass products; and fabricated metal products have reported gains - some seasonal - since the last Beige Book. Lower activity was reported by makers of food products, primary metals, industrial machinery, electronic equipment, and instruments. Contacts report that many customers are delaying purchases due to uncertainty stemming from the European crisis and domestic fiscal policy.
Optimism among Third District manufacturers that business conditions will improve or stay the same during the next six months remains widespread, though slightly less pervasive than reported in the last Beige Book. Among the major sectors cited above, contacts at firms in the food and lumber industries expect some growth, while contacts at fabricated metals and industrial machinery firms expect some decline. Other major sectors expect no significant change over the next six months. Firms have slightly lowered their overall expectations of future capital spending and future hiring since the last Beige Book. Contacts mentioned ongoing demand for autos, power generation utilities, and Marcellus shale gas as sources of growth and optimism.
Retail. Third District retailers reported a pickup in year-over-year sales for July compared with June. In early August, a retail outlet operator reported stronger sales but softer traffic counts. One contact noted that Olympic viewership numbers were very strong and may have dampened traffic. Another contact relayed the theory that the pervasive negative political advertising will dampen sales until after the election by displacing product ads and by creating a negative sales climate. According to some contacts, children’s clothing is typically the last retail category to experience declining sales in a downturn. Sales of children’s clothing did not improve in July after a surprising year-over-year decline in June. Despite these various headwinds, retail contacts remain cautiously optimistic.
Auto sales remained moderate in Pennsylvania in July as in June, while New Jersey dealers tended to report a repeat of their strong June sales in July and early August. Strong demand and lean inventories are helping to support dealer profits despite weak demand for dealer services, parts, and repairs. The longer-term outlook for sales remains positive. Contacts point out that the average age of cars has risen to 11 years, generating strong pent-up demand. However, dealers remain concerned that rising consumer uncertainty will dampen sales for the second half of the year.
Finance. Contacts from the Third District’s financial sector have reported ongoing growth since the previous Beige Book. Larger lenders reported loan growth in mortgages, personal loans, small business loans, and C&I loans. Smaller lenders continue to report increases primarily as gains in market share in various lending segments from other banks - large and small. Several small lenders reported increased activity in mortgages and home refinancings. Most contacts report that the financial health of households, businesses, and financial institutions continues to improve. Although the overall outlook among lenders was positive, there is an expectation of tempered growth until after the election, and there are concerns about the impacts of the fiscal decisions that will follow.
Real Estate and Construction. Residential builders reported a modest increase in sales and a stronger increase in traffic - an improvement since the last Beige Book - as they near the end of their primary sales season. Large builders are shifting their portfolios toward more multifamily products and more urban locations. Some small builders are shifting into home renovation work. Residential brokers reported continued improvement in the sales of existing homes through July. Inventory levels are also falling. As the traditional sales season draws to a close, an anticipated surge of listings from the shadow inventory is not expected until spring 2013, assuming existing home sales remain relatively strong. Builders and brokers share a cautiously optimistic outlook.
Overall, nonresidential real estate activity has continued to grow slowly since the last Beige Book. As Center City Philadelphia attracts more apartments and condos - new construction and conversions - the remaining supply of office and retail space has tightened somewhat. Moreover, the increased population is attracting the interest of outside retailers. Contacts also indicated some increased interest in commercial properties in southern New Jersey. The overall outlook for nonresidential real estate remains one of slow growth, but it has solidified and broadened throughout the Third District since the last Beige Book.
Services. Third District service-sector firms have reported little to no growth since the last Beige Book. Several contacts reported that orders and activity have flattened out. Logistics firms and carriers reported a relatively flat start to the traditional “freight season,” which should have ramped up in June. One contact reported that reduced crop yields from widespread drought-stricken areas have generated an excess supply of drivers and trucks, which may have siphoned normal business from other firms. Staffing firms report no net new orders. One large firm that had been extending temp contracts has begun letting them expire. Hospitals report some growth, which may reflect demand for elective procedures that were deferred during the recession. Additional growth may reflect expansions that garner greater market share. Advertising is a rare bright spot. Revenue from the Olympics and election-year advertising has surpassed expectations, on top of a positive underlying trend. Overall, service-sector firms’ positive outlook for growth over the next six months has been somewhat tempered.
Prices and Wages. Price levels changed little overall, although gas prices have risen a little since the previous Beige Book. Cost factors have risen slightly among manufacturing firms since the last Beige Book. One manufacturer reported that the drought and heat conditions have contributed to relatively lower diesel prices and to higher peak energy prices, respectively. Homebuilders and retailers continue to report tight margins but little additional escalation of the prices that they face. Contacts from all sectors report little or no wage pressures, other than for medical benefits. Many contacts report stabilized house prices for lower-cost homes. Now, some contacts report that the prices of homes in a few affluent areas are beginning to stabilize as well.