U.S. Federal Reserve Beige Book: Philadelphia District (Text)

The following is the text of the Federal Reserve Board’s Third District-- Philadelphia.

After many months at a generally more modest pace of growth, aggregate business activity in the Third District has accelerated somewhat to a moderate pace of growth during this current Beige Book period. In particular, the growth rate of residential construction, general retail sales, general services, staffing services, and tourism appears to have accelerated somewhat from a more modest rate of growth to join auto sales and existing home sales at a moderate growth rate. Commercial real estate leasing continued to expand at modest rates, while commercial real estate construction continued to expand only slightly. Manufacturing appears to have declined somewhat after expanding slightly last period. Loan volumes at Third District banks resumed growing slightly across most categories, while credit quality continued to improve. General price levels, as well as wages and home prices, were reported to have increased slightly overall - similar to the last Beige Book period.

The overall outlook for growth has improved slightly since the last Beige Book to anticipate a continuation of the current moderate pace of growth. Despite lingering uncertainties, contacts expressed greater confidence in the underlying strength of the economy, especially as the housing market recovery begins to gain strength. Firms are more comfortable reinvesting where necessary; however, many continue to hold off on major expansion plans of capital and labor until the recovery gains more momentum.


Since the last Beige Book, Third District manufacturers have reported that orders and shipments have fallen somewhat. The makers of food products, lumber and wood products, paper products, and fabricated metals have reported gains since the last Beige Book. The makers of primary metals, electronic equipment, and instruments reported lower activity. Reports were mixed for makers of industrial machinery. Firms supplying the home-building sector reported strong orders and ongoing hiring to keep pace. Other contacts attributed growing demand to the oil and gas, auto-related, and aerospace sectors. Firms supplying other sectors reported flat or weakened demand. Employment levels were generally reported as flat to down.

Across all sectors, Third District manufacturers remained optimistic that business conditions will improve over the next six months. One contact from a housing-related manufacturer reported that orders from contractors were 22 percent ahead of last year; still, another stated that “firming in the housing market is key to a more favorable outlook” from his firm’s dealers. Overall, firms have somewhat increased their expectations of future hiring and their plans for capital spending since the last Beige Book.


Third District retailers reported moderate growth overall. Since Easter sales shifted to March this year, April began with a continuation of modest growth; however, retailers reported strong sales for Mother’s Day weekend. Restaurants were booked with moms and their families, which generated heavy traffic and sales for adjacent retailers. Volatile spring temperatures created challenges for apparel retailers as shoppers shifted their interest between winter and summer lines with the rise and fall of the thermometer. Promotional sales remained critical for producing the best results for many retailers.

Auto dealers have continued to report a moderate pace of sales growth since the last Beige Book, with some weekly variability. Sales in the Philadelphia market were described as strong. Dealers continued to maintain lean inventories and have retained a positive outlook. However, hiring plans remain tentative and modest; expectations of rising health-care costs further constrain the willingness of dealers to expand their workforces.


Overall, Third District financial firms have reported slight increases in total loan volume since the previous Beige Book. Banking contacts cited stronger demand for C&I loans and real estate loans - commercial and residential. Credit card loan volumes were relatively unchanged, while reports of other consumer lending were mixed. A nascent housing recovery in many Third District markets has increased demand for new mortgages and the ratio of purchases to refinancings. A small amount of hiring has been prompted at banks and bank servicing companies by the moderate recovery, as well as by changing compliance regulations.

Banking contacts reported little change in lending standards overall; however, a few banks reported some easing for commercial real estate loans. Most banks continued to report improving credit quality. Many banks cited strong competition within their local markets. Financial institutions remain generally optimistic about future growth.

Real Estate and Construction.

Following a little softness, homebuilders throughout most of the Third District resumed a moderate growth of contracts signed for new construction. Contracts signed from January through May - “Five good months in a row!” one builder exclaimed - have generated significantly greater construction activity than last year for many builders, large and small. Significant cost pressures face builders as the long housing recession has disrupted the supply chain for materials and the pool of skilled workers. In addition, some builders have faced labor shortages due to higher wages offered for certain trades that are in demand for the Hurricane Sandy recovery. Residential brokers reported moderate activity during April and May for the Third District overall. Existing home sales that closed during the period varied geographically with strong growth reported in the Philadelphia market. Brokers were also pleased by even stronger growth of sales contracts pending, which was more widely reported

throughout the District. The estimated months’ supply of the existing inventory of homes continued to fall significantly. Brokers still expect that a shadow inventory of homes held by reluctant, if not underwater, owners will emerge as prices begin to rise once more.

Nonresidential real estate contacts continued to report little change in the modest pace of overall leasing activity and slight growth of construction. New office construction remains limited to an occasional build-to-suit client, while most construction activity is related to ongoing demand for industrial warehouse space, multifamily residential units, higher education facilities, and public utility infrastructure. Contacts continue to report the presence of too many firms chasing too few projects, such that margins are squeezed thin on winning bids. Overall, contacts expect slow steady growth but remain optimistic, citing greater prospect activity and a greater willingness to make decisions.


Third District service-sector firms are reporting a moderate pace of growth overall - a bit stronger than the last Beige Book. On the heels of a strong winter/spring season, resorts in the Poconos are entering their summer season with strong bookings and many sold-out weekends. Stronger cash flows are allowing properties to reinvest by refurbishing and adding new amenities. At least one major new resort is making plans to enter the market. Early bookings are also up along the shore in Delaware and New Jersey. In the wake of Hurricane Sandy, the state of New Jersey has launched a sizeable marketing campaign to remind people that most of the shoreline tourist area remains intact and ready for vacationers.

In other sectors, staffing firms have reported strong increases in billable hours - an improvement since the prior Beige Book. Staffing contacts cited no wage pressures and expressed more positive outlooks for future growth. Other service-sector firms reported steady growth and credited the recovering housing markets with strengthening and expanding the base of consumer spending. Firms are hiring, although not aggressively. Overall, service-sector firms remain generally optimistic about future growth.

Prices and Wages.

Overall, price levels continued to increase slightly, similar to the previous Beige Book. Manufacturing firms continued to report slight overall increases for prices paid and slight overall decreases in prices received. Auto dealers reported no changes in pricing. Despite passing along some costs, homebuilders continued to face tight margins with lumber and skilled labor commanding high prices. Most real estate contacts reported stable, if not rising, prices for lower priced homes, and contacts in some markets noted stable prices for higher priced homes. Wage pressures remain constrained, according to most contacts other than homebuilders. Rising costs associated with medical insurance benefits remain a concern for many employers.

SOURCE: Federal Reserve Board

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