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

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


Aggregate business activity in the Third District maintained an overall moderate pace of growth during this current Beige Book period. In particular, auto sales accelerated to a strong rate of growth, lending firmed up to a modest rate of growth, and manufacturing activity appears to have grown slightly after declining slightly last period. The growth rate of residential construction, existing home sales, and general services continued at a moderate pace. Commercial real estate leasing continued to expand at modest rates, while commercial real estate construction continued to expand only slightly. General retail sales, staffing services, and tourism appear to have resumed a modest rate of growth this period after a small surge last period. Manufacturing has resumed at a slight rate of growth after declining slightly last period. Loan volumes at Third District banks grew at a modest pace across most categories, a little faster than last period. Credit quality continued to improve. Little change was reported for general price levels as well as for wages and home prices. Contacts reported slight increases overall - similar to the last Beige Book period.

An overall outlook for moderate growth has continued since the last Beige Book. Contacts expressed greater confidence in the consumer and in the sustainability of current trends. Firms remain cautious about hiring and about carrying out their long-term capital expenditure plans. However, firms are more comfortable investing when necessary to replace or upgrade aging equipment and to meet growing demand.

Manufacturing. Since the last Beige Book, Third District manufacturers have reported that orders and shipments are rising again. The makers of paper products, rubber products, fabricated metals, industrial machinery, and instruments have reported gains since the last Beige Book. Firms supplying the home-building sector continued to report strong orders and ongoing hiring to keep pace. The makers of food products and electronic equipment reported lower activity (some was seasonal). Reports were mixed for makers of primary metals. Other contacts attributed growing demand to auto-related business and foreign demand. A negative impact from sequestration was cited by some firms, while others said they avoided the worst effects. Firms continued to report restraint in current hiring but a desire to hire more workers in the near future.

Across nearly all sectors, Third District manufacturers remained optimistic that business conditions will improve over the next six months. Business plans for the remainder of the year have been lowered slightly for some firms. However, firms appear more confident of ongoing, steady growth and more willing to invest in capacity and hire new workers as needed to keep pace with demand. Overall, firms have significantly increased their expectations of future hiring and their plans for capital spending since the last Beige Book.

Retail. Third District retailers have reported modest growth - dampened by rainy weather - since the last Beige Book. Contacts described June and July as seasonally slower months, as local residents head off for summer vacations. However, excessive rain in June kept still more people away from stores, while some showed up just to “hang out” at the mall. Mall operators reported that the general retail climate has improved, citing stronger demand for retail space and rising occupancy rates.

Auto dealers reported that June sales accelerated to a strong rate of growth. Sales, described as “on fire” for the first couple of weeks of June, may have produced “the best [June sales] in six years.” Dealers attributed a better sales climate, in part, to no supply problems, no credit problems, and falling unemployment rates. Dealers are bullish for the next couple of years but continue to hire cautiously.

Finance. Overall, Third District financial firms reported modest increases in total loan volume - a slight improvement since the previous Beige Book. Banking contacts cited stronger demand for all major loan categories, including C&I loans, real estate loans, and consumer loans, including credit cards. Consumer lending and home equity loans remained slow, as refinancings remained a preferred option for homeowners. However, contacts reported a decline in refinance applications in the pipeline after rates rose. Meanwhile, increasing sales of new and existing homes are raising demand for home mortgages. Banking contacts continued to report strong competition for loans and concerns about competitors lowering their lending standards. However, most banks reported “improvement in all aspects of business,” including “more upgrades of credits” within their own portfolios. Contacts expressed continued optimism for future growth and sensed greater customer confidence.

Real Estate and Construction. Homebuilders throughout most of the Third District continued to report moderate growth. Though traffic and sales were soft in a few markets, most builders are meeting their plan for the year with increases as high as 40 percent. Builders reported no systemic impediments to sales, such as credit availability and mortgage issues. Some builders still face labor shortages for carpentry and framing work, and several contacts have reported a shortage of finished land. Moderate growth of existing home sales continued through June, according to residential brokers. Sales closed and sales pending grew by double digits (year over year) in several larger metropolitan areas in the Third District. The estimated months’ supply of the existing inventory of homes has fallen to near six months in many areas. Brokers say the anticipated shadow inventory of homes has not yet emerged.

Nonresidential real estate contacts continued to report little change in the modest pace of overall leasing activity and slight growth of construction. Although the overall climate for new construction “is getting incrementally better,” contacts reported a renewed strong push for industrial structures along the I-81 and I-76 corridors throughout eastern Pennsylvania and into central New Jersey. Construction activity also remains greater for multifamily residential units, higher education facilities, and public utility infrastructure. Contacts continued to report heavy competition and thin margins on projects. Overall, contacts remained optimistic for a continuation of slow, steady growth.

Services. Third District service-sector firms continued to report a moderate pace of growth overall. Despite earlier strong bookings, shore destinations in Delaware and New Jersey reported somewhat lower activity (traffic counts, bookings, and boardwalk sales) and cited rainy weather through much of June as one source of the problem. A multimillion dollar advertising campaign has helped boost Jersey Shore activity, but tourism in the areas hardest hit by Hurricane Sandy is still down somewhat more than is necessitated by the actual damage. Casino revenues from Atlantic City and the state of Delaware remain on a downward trend, and reports from Pennsylvania casinos indicate that revenue from slot machines appears to be turning in the same direction.

In other sectors, firms cite steady progress - rising consumer confidence, limited cost pressures, and growing sales. A staffing firm reported a slight sag in billable hours for June following strong growth through May year to date. Other service-sector firms reported “incrementally better” growth, tight margins, and cautious hiring. Contacts offer mixed reports on their ability to attract qualified workers while generally citing no wage pressures. Overall, service-sector firms remain optimistic about future growth.

Prices and Wages. Overall, price levels continued to increase slightly, similar to the previous Beige Book. Manufacturing firms reported modest increases for prices paid and prices received. Auto dealers reported no changes in pricing. Homebuilders continued to face tight margins and higher prices for some skilled labor. 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. Contacts from retail, restaurants, and some services indicated that commodity prices have not been a big issue this year as in the recent past. Wage pressures remain constrained, according to most contacts other than homebuilders.

SOURCE: Federal Reserve Board

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