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 resumed the modest pace of growth that was evident prior to the disruption by Hurricane Sandy during the previous Beige Book period. In particular, general retail sales, general services, and commercial real estate leasing recovered from temporarily mild growth rates to resume their previously modest growth rates. Sales of new and used autos accelerated to a moderate rate of growth, and residential real estate sales maintained a strong year-over-year growth rate (from a relatively low base). Mild rates of growth are once again evident in manufacturing, staffing services, transportation services, and construction after many sectors suffered storm-related disruptions. Lending volumes at Third District banks also continued to experience slight growth, and credit quality has continued to improve. Overall, beach-going tourist areas are experiencing a typical slow season; however, some storm-damaged areas have lost significant business while some areas that escaped the damage are doing well. General price levels, as well as wages and home prices, were reported to have increased slightly overall. This remains similar to the last Beige Book period, except for home prices, which had remained flat overall.
The overall outlook for at least modest growth is considerably more optimistic relative to the views expressed in the last Beige Book. Contacts reported underlying strength in many sectors and expressed relief that part of the fiscal cliff dilemma has been resolved. Contacts from virtually all sectors reported greater expectations of future growth than during our last survey period. Plans for future hiring were also significantly more expansive. Most contacts continued to express concerns over the impact from the recent payroll tax increase and the remaining potential budget cuts that might reduce demand.
Manufacturing. Since the last Beige Book, Third District manufacturers have reported that orders and shipments have recovered to a pace of slight growth. The mild pace can be partially attributed to seasonal trends. Comments from contacts focused primarily on small upticks, new product demand, and emerging markets, rather than on disappointing orders. Makers of food products, lumber and wood products, primary metals, fabricated metal products, and instruments have reported gains since the last Beige Book. Lower activity was reported by makers of industrial machinery and electronic equipment.
Optimism among Third District manufacturers that business conditions will improve during the next six months has rebounded strongly since the last Beige Book and is evident across nearly all sectors. Firms have also significantly raised their overall expectations of future hiring and their plans for capital spending since the last Beige Book.
Retail. Third District retail sales recovered to a modest pace of growth for the holiday shopping season after the disruptions of Hurricane Sandy, according to retail contacts. Sales reports were mixed for mid-market department stores and some home furnishing stores, which reported moderate early holiday sales gains followed by a lull, with slight declines from the prior year. High-end department stores, family apparel stores, and outlet stores reported modest or moderate year-over-year sales throughout the holiday period. Some substantial mall tenants posted strong double-digit sales growth. Until final sales are tallied, retail contacts relied on other early indicators to suggest that the final days of the holiday shopping season had grown modestly, or better. Traditional mall retailers continued to draw shoppers with promotions, while outlet stores used fewer promotions than in prior years. Shopper surveys revealed concern over the consumers’ future paychecks from the pending fiscal cliff negotiations.
Auto sales finished the year at a moderate pace of growth - combining the sector’s slower pre-storm pace with a bump up for replacement of cars damaged by the storm. In particular, New Jersey dealers reported strong double-digit December sales, capping a third consecutive year of sales growth. The outlook among dealers remains positive; however, prospects for 2013 are not as strong as they were for 2012. “Consumers will feel a pinch” from the payroll tax increase and continued uncertainty about possible budget cuts.
Finance. Overall, loan volumes have continued to grow at a slight pace across Third District financial firms since the previous Beige Book. A flurry of year-end business lending kept banks busy facilitating tax-oriented business decisions involving sales and liquidations, mergers and acquisitions, accelerated depreciation, and dividend payouts. Home mortgage refinancing rates continued to remain high. In describing their competition as very aggressive, lenders expressed awareness of some potential portfolio risk, even while the credit quality of their borrowers continued to improve. Generally, financial institutions are expecting growth to continue, if not improve.
Real Estate and Construction. Residential builders reported one final surge of contract activity in November and then a downswing in December to conclude with slight year-over-year growth for the period. Despite facing erratic swings in demand through the year, our contacts reported very strong year-over-year growth for the entire year, which is more indicative of their own gains in market share than of the sector overall. Residential brokers reported robust year-over-year sales growth in November, with steady year-end momentum. As with new home construction, existing home sales are growing from a low base. Builders and, to a greater extent, brokers are optimistic that recent growth will be sustained in 2013. As with other sectors, contacts expressed concern that the fiscal cliff negotiations had been extended into their important first quarter.
Nonresidential real estate contacts reported renewed modest growth in overall leasing activity and continued slight growth in construction. Leasing activity finished the year with sustained double-digit growth. Notably, in the fourth quarter, contacts began “to see a re-emergence of leasing demand in lagging submarkets” (in the Greater Philadelphia metro area), including southern New Jersey. Stronger employment growth of professional services is credited with much of the demand; however, that demand is partially offset, as existing firms are consolidating and adjusting to more efficient overall office spaces with smaller square footage per person. New construction of large industrial/warehouse space is planned in 2013 in the Harrisburg-Lehigh Valley corridor on the heels of similar spaces built this year; no such construction is anticipated in the southern New Jersey market area. New apartment/condominium projects continue to emerge throughout the Greater Philadelphia region, especially in Center City. Nonresidential real estate contacts retain an outlook of slow, steady growth.
Services. Third District service-sector firms have resumed a more modest pace of growth since the last Beige Book, according to contacts in various sectors. Tourist areas along the Delaware and New Jersey shores are in various stages of recovery from Hurricane Sandy. Atlantic City casinos reported significantly lower revenues in November (as much as $55 million) compared with 2011. Businesses and rental housing that serve the central and northern Jersey Shore communities continued to lose some of the money they would have earned in the low season. Southern New Jersey and Delaware beach communities are largely intact and operating normally. A Delaware beach hotel owner reported a strong December finish to the year, which was partly due to an extra holiday weekend. District staffing firms reported a mild pace of growth at year’s end - an improvement after the storm disruptions. Staffing contacts expect moderate growth in 2013 but are watching their clients’ reactions to the serial fiscal cliff decisions. Defense-related firms received no relief from the uncertainty of budget cuts that has held their business plans in stasis for the past year. Overall, service-sector firms expressed more confidence in their expectations for growth in the near future.
Prices and Wages. Overall, price levels continued to increase slightly, similar to the previous Beige Book. Cost factors among manufacturing firms held steady, while the prices they received rose a little. Tighter auto inventories generate a price environment that favors auto dealers over their customers. Homebuilders noted that rising commodity prices had added about 3 percent to the cost of a new home in the past 90 days. In addition, roofing and siding contractors have lost crews to the Jersey Shore repairs. Real estate contacts continued to report that house prices are firming up and that houses in some markets are receiving multiple offers. Rents are rising in most segments of the Philadelphia central business district market and for industrial space along the corridor from Carlisle, PA, to the Lehigh Valley. In other segments and geographies, rents are flat or still falling. Contacts from all sectors continued to report that wages rose only a little, if at all. After a good year, two homebuilders reported issuing the first pay raises to their staffs in several years. Contacts did report strong growth in unemployment compensation and workers’ compensation costs.
SOURCE: Federal Reserve Board