The following is the text of the Federal Reserve Board’s Third District-- Philadelphia.
THIRD DISTRICT - PHILADELPHIA
Aggregate business activity in the Third District has continued to improve - growing modestly - since the previous Beige Book. A couple of sectors grew faster than the average, while a few declined slightly. Manufacturing activity declined somewhat, although a slight increase in new orders may presage a turnabout. Retail sales growth has continued at a modest pace since the last Beige Book, while auto sales have continued to increase at a strong pace. Lending volumes at Third District banks have continued to grow modestly, and credit quality has continued to improve. Sales of new homes have slowed since the previous Beige Book period, while brokers report strong growth in sales of existing homes (from previously low levels). Commercial real estate contacts reported less leasing activity and continued weak demand for new construction. Service-sector firms reported mixed results with stronger tourist visitation, a slowing defense sector, and modest growth across most other service sectors. Price pressures have changed little since the last Beige Book.
The overall outlook appears somewhat more optimistic relative to the views expressed in the last Beige Book, as contacts are beginning to look beyond the pending election and looming fiscal cliff. Expectations among manufacturers improved significantly for overall activity over the next six months, while plans for capital spending and hiring were mixed. Auto dealers and real estate firms are more optimistic, as their positive trends gain traction. Holiday sales expectations are strong among many general retailers. Financial- and service-sector contacts express a mix of views regarding the future - generally positive with varying degrees of caution.
Manufacturing. Since the last Beige Book, Third District manufacturers have continued to report overall declines in shipments, but a slight increase in new orders. Makers of lumber and wood products; stone, clay, and glass products; fabricated metal products; and instruments have reported gains since the last Beige Book. Lower activity was reported by makers of primary metals, industrial machinery, and electronic equipment. One manufacturer summarized the broad economic climate as a summer slowdown with sequential improvement, marked by a definite increase in August.
Optimism among Third District manufacturers that business conditions will improve during the next six months has grown significantly since the last Beige Book and is evident across most sectors. Plans were recently announced to restart the third of three District refineries that were all at risk of closing one year ago; the other two were previously rescued. Firms have raised their overall expectations of future hiring, but plans for capital spending have softened since the last Beige Book.
Retail. Overall, Third District retailers reported little change between the modest year-over-year sales growth in August compared with July, although one contact stated that his store experienced the strongest Labor Day weekend in years. This year’s sunny weather certainly helped compared with last year’s storms. One department store manager reported that back-to-school sales did well, cold-weather clothing is moving better than last year, and discretionary “fun” items are selling well. Retail contacts are bullish for the upcoming holiday season, speculating that people will be primed to respond to upbeat holiday advertising after the long, negative political campaign season. An expectation of greater seasonal hiring has been widely discussed. And the holiday calendar provides a 32-day shopping season - the longest possible.
There has also been little change in the pace of auto sales since the last Beige Book. Pennsylvania dealers reported ongoing moderate growth in August; New Jersey dealers recorded a third consecutive strong sales month in August and described September sales as “good.” The outlook among dealers remains positive. One contact stated “confidence is back, credit is back, and leasing is back.” However, dealers remain somewhat cautious through this political season regarding consumer uncertainty.
Finance. Overall, Third District financial firms have reported continued growth since the previous Beige Book. Loan volumes grew modestly across most categories. Contacts describe fierce competition for small business loans from large and small banks. Despite high charge-off rates and ongoing household deleveraging, credit card outstandings have been virtually flat since the last Beige Book. Most contacts report that the financial health of households, businesses, and financial institutions continues to improve. The overall outlook among lenders remains positive.
Real Estate and Construction. Residential builders reported a drop-off in traffic and slower sales in August and early September - a disappointing conclusion to their primary sales season. Builders lament that people are choosing to rent rather than buy even when local rents exceed the total cost of owning a home. Residential brokers reported somewhat stronger year-over-year sales growth in August than expressed in the last Beige Book and continued strength into September. Inventory levels of real estate listings remain at lower levels than one year ago with no signs of a large emerging shadow inventory. Multiple bids are reported for homes priced between $250,000 and $400,000; more very high-end listings are beginning to appear and test the market. Builders and brokers remain cautiously optimistic.
Nonresidential real estate contacts reported a big slowdown in August and a disappointingly small rebound in September. However, conditions remain better than one year ago, with more prospects, faster decision-making, and few downsizings outside of southern New Jersey. There is very little demand for new office/commercial buildings, but the industrial market remains strong, especially in the Lehigh Valley and central Pennsylvania markets. Center City Philadelphia and adjacent areas in West Philadelphia and the Navy Yard are an exception, with very busy design/build work for higher education, hotels, and multifamily apartments and condominiums. However, many professional architects and engineers - experienced and novice - remain out of work or underemployed. Nonresidential real estate contacts retain an outlook of slow, steady growth.
Services. Third District service-sector firms have reported mixed growth since the last Beige Book. Tourist areas along the Delaware and New Jersey shores, in the Poconos, around Philadelphia, and throughout central Pennsylvania have reported strong visitation and/or lodging numbers relative to recent years. Atlantic City casinos and some neighboring shore areas were exceptions. Jersey shore businesses expressed considerable disappointment over cautious tourist spending; Delaware shore business also noted some caution. However, the tourist season concluded on a high note as the Labor Day weekend benefited by comparison to last year when severe weather disrupted end-of-summer plans. District staffing firms reported little change in orders, hiring mix, and wages. One firm continued to report extremely busy orders for manufacturing workers - better than in recent years - but expects a seasonal decline beginning in October. Demand for professional/business and health-care staff remains slower. Defense-related firms reported that there are fewer large contracts on which to bid and that they have continued to lower their expectations for 2013 and 2014 as sequestration or an alternative budget deal nears. Overall, other service-sector firms report a modest but positive outlook for six months out.
Prices and Wages. Price levels have continued to show little overall change since the previous Beige Book. Once again, cost factors have risen slightly among manufacturing firms but the increase is less than it was during the previous Beige Book; prices received by manufacturers fell. Homebuilders and retailers indicated few significant changes in their cost pressures or prices they charge. One homebuilder attempted to raise prices but couldn’t make them stick. Real estate contacts continue to report that lower-cost homes have reached a price floor in most markets and are beginning to rise slightly in some neighborhoods. Leasing agents have been unable to charge higher leasing rates in nearly all markets, except for industrial space along the corridor from Carlisle, PA, to the Lehigh Valley. Contacts from all sectors report little or no wage pressures, other than for medical benefits.
SOURCE: Federal Reserve Board