The following is the text of the Federal Reserve Board’s Third District-- Philadelphia.
THIRD DISTRICT - PHILADELPHIA
Aggregate business activity in the Third District continued to grow modestly - comparable to the previous Beige Book - until the end of October. After pummeling the Mid-Atlantic coast, Hurricane Sandy made landfall in southern New Jersey as a tropical storm on October 29, moving quickly inland and over the Greater Philadelphia area. While the storm took a path through the heart of the Third District, the most severe impacts were felt along the central New Jersey shoreline and beyond our region in northern New Jersey, New York City, and Long Island where the wind and storm surges were greatest. Overall, the storm left over a hundred people dead, 8.5 million customers without power across 21 states, thousands of homes damaged or destroyed, and tens of billions of dollars of damage and economic disruption. Third District residents and businesses bore a substantial share of the damage; the Third District economy lost a couple of days’ output.
Most individual sectors, abetted by Hurricane Sandy, declined a little further or slowed their pace slightly. Manufacturing activity declined a bit. Retail sales slowed to a slight pace of growth, while auto sales slowed to a modest pace. Lending volumes at Third District banks have continued to grow slightly, and credit quality has continued to improve. Signed contracts for new home construction have slowed, while brokers report strong percentage growth in sales of existing homes. Commercial real estate contacts reported slightly more leasing activity and some initial interest for new office construction, as well as robust construction for industrial space. Service-sector firms reported generally slower growth with significant challenges facing tourism. Price pressures have changed little.
The overall outlook appears less optimistic relative to the views expressed in the last Beige Book. Recovery from Hurricane Sandy and a renewed focus on the looming fiscal cliff contribute to greater uncertainty than before. Expectations over the next six months among manufacturers declined for overall activity as well as for capital spending and hiring. Auto dealers, contractors, real estate firms, and financial service contacts remain optimistic, as their ongoing positive trends are supported further by recovery spending. Holiday sales expectations remain strong but have diminished slightly among general retailers. Service-sector contacts express a mix of outlooks with a substantial cloud hanging over the Jersey Shore’s tourism industry.
Manufacturing. Hurricane Sandy’s impact on Third District manufacturers seems to have somewhat accelerated the slight overall declines in orders and shipments reported during the prior Beige Book period. The immediate economic impact from Sandy is largely negative - a combination of economic disruptions and destruction of capital. Nevertheless, makers of food products, lumber and wood products, fabricated metal products, and instruments reported further gains. Makers of primary metals, industrial machinery, and electronic equipment reported further declines. A significant global manufacturer reported that growth in the U.S. and worldwide is weak and continues to slow; this firm and another large exporter specifically reported that growth in China is slowing further.
Expectations among Third District manufacturers that business conditions will improve during the next six months softened in October then held steady through mid-November despite the election and the storm. Firms in several sectors anticipate additional demand over the next three to six months from storm-related rebuilding activity. However, firms also reported lower expectations of future hiring increases and slight declines in future capital spending.
Retail. Prior to the storm’s advance, Third District retailers reported a small improvement in October’s year-over-year sales trends following a disappointing decrease in September sales. The storm is said to have wrecked those gains temporarily. Sales shifted to necessities then slowed overall on October’s final weekend as the storm approached. In many areas throughout the District, malls closed for most of two days - which are otherwise slow days of a slow week prior to the start of the holiday shopping season. By opening while many local school districts were still closed, these retailers attracted high food sales, but general retail sales remained slow and focused on hard goods through the weekend following the storm. One drug store chain closed 790 locations during the storm’s peak on October 29th; only one remained completely closed two weeks later in a nearly inaccessible stretch of the Jersey Shore. Chain stores, restaurants, and independent retailers remain closed in scattered locations from Cape May to Point Pleasant Beach. More severe property damage clustered along the narrowest strips of the barrier islands where the ocean met the bay at the height of the storm. While rebuilding raised sales expectations for home repair supplies, the storm tarnished expectations for the atypically long holiday sales season, as households are preoccupied with recovery efforts.
Auto dealers reported that October sales had been somewhat “flat” in New Jersey at 5.7 percent year-over-year growth and slowed a little in Pennsylvania prior to the storm. Sales fell off on the weekend prior to the storm and for the following two weeks. A significant sales bump is expected in November, as insurance companies begin to cut claims checks for an estimated 30,000 cars damaged in New Jersey. The stronger sales may extend over several months. In addition, an estimated 15,000 new cars awaiting delivery to dealerships were reported to be irreparably damaged by storm surge at the Port Newark-Elizabeth Marine Terminal in northern New Jersey. This loss will further tighten inventories at new car dealers throughout the eastern seaboard.
Finance. Third District financial firms have reported continued growth with a slight overall improvement since the prior Beige Book. This growth has occurred despite contacts reporting that many customers have been in a “wait-and-see mode” regarding capital investment decisions with respect to the nation’s upcoming fiscal decisions. Power outages associated with Hurricane Sandy created widespread bank and ATM closings, but few long-term disruptions or significant losses. While credit quality continued to improve, contacts suggest that the storm impacts may create a surge in cash flow borrowing and an increase in delinquencies, especially for New Jersey businesses and homeowners. Lenders maintain a positive outlook.
Real Estate and Construction. October began as a disappointing month for some residential builders, punctuated by Hurricane Sandy, which closed their offices and reduced their traffic. Brokers continued to report significantly stronger sales activity (from previously low levels) and expect to conclude their strongest year of the recovery despite the storm impacts. Inventory levels of real estate listings are significantly lower than one year ago. Jersey Shore real estate has been thrown into turmoil by an excess of displaced residents, in addition to utility, construction, and FEMA workers competing for all available rental units as temporary housing. Construction activity has already begun on the easy repairs, but it is likely to take years to repair or replace the thousands of homes damaged and demolished. Overall, builders and brokers remain cautiously optimistic.
Nonresidential real estate contacts reported that prospect activity was up slightly; large blocks of Class A office space in Philadelphia’s central business district were becoming scarce; and growing companies have begun to talk about new buildings. Construction activity for industrial space continued apace with over 7 million square feet of active construction from Chambersburg, PA, to Easton, PA, and from Pittston, PA, to Middletown, DE. Storm impacts were generally described as minimal away from the shore; however, some contractors noted that extensive repair work has already begun on some critical facilities requiring significant amounts of well-paid union jobs on weekend and overtime schedules. Nonresidential real estate contacts retain a positive outlook for slow, steady growth.
Services. The growth of Third District service-sector firms has succumbed to the perils of Hurricane Sandy and has slowed, if not declined, since the last Beige Book. Tourist areas on the Delaware and New Jersey coasts suffered a severe blow; most of the Delaware shore and parts of the South Jersey shore saw limited damage and are largely open for business. However, many areas were awash - houses demolished and businesses and their infrastructure and/or inventories ruined. Revenue reports suggest that Atlantic City casinos alone may have lost about $35 million by the end of October, despite suffering little damage. Contacts suggest the casinos have been losing another $5 million a day since. The storm also caused the cancellation of the city’s largest regular, annual convention and the delay (at best) of several others. Some of the barrier island homes well north of Atlantic City are now inaccessible - cut off by new channels carved by the storm from the bay to the sea. Most of the Jersey Shore will likely be rebuilt and ready for the summer season; however, some year-round businesses will not survive this off off-season; others may never rebuild.
Most District staffing firms reported an ongoing slowdown in activity, although a few business lines associated with warehousing and distribution in advance of the pending holiday season were the strongest in over a decade. Staffing firms tended to suffer disproportionately greater revenue losses as their contract workers were unable to log hours when the storm impacts shuttered their offices. With the possibility of sequestration looming, many firms reported taking this time as an opportunity to restructure for efficiency (with potential layoffs), as many defense-related firms have already done or are in the process of doing. While attention has been focused on Hurricane Sandy and the fiscal cliff, some firms reported strong gains from the enormous advertising dollars during this election year, while others reported losses from the NHL lockout. Overall, the steady, modest growth of other service-sector firms has slowed slightly in recent weeks, and the positive outlook for continued growth six months out has grown a little more uncertain.
Prices and Wages. Price levels have continued to show little overall change since the previous Beige Book. Cost factors have risen somewhat among manufacturing firms as have prices received. Homebuilders and retailers indicated that modest cost pressures continue and that strong competition restrains the prices that they can charge. Builders and contractors were beginning to grow concerned about labor shortages and rising wages, as general activity increased; Hurricane Sandy has escalated their concerns in New Jersey, as rebuilding begins to draw labor to storm-damaged areas. With few exceptions, most low-end home markets have stable or slightly rising prices, while most high-end home markets are still trending lower. One contact speculated that prices will probably fall further in storm-damaged areas along the Jersey Shore. Commercial real estate contacts expressed little change in leasing trends. Similarly, wage pressures remain minimal for most positions; medical benefits continue to trend higher.
SOURCE: Federal Reserve Board