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 continued at a moderate pace of growth during this current Beige Book period. Moderate rates of growth continued for general services, existing home sales, and home construction. Homebuilders felt their sales may have been partially dampened by rising mortgage rates; however, construction remained well above its level of a year ago. Meanwhile, auto sales continued their strong rate of growth; growth of freight shipping was also strong. General retail sales, commercial real estate leasing, staffing services, and tourism continued to expand at modest rates, while manufacturing and commercial real estate construction continued to expand only slightly. Loan volumes at Third District banks grew at a modest pace across most categories; credit quality continued to improve. Contacts reported slight increases overall for general price levels as well as for wages and home prices - 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 U.S. economy and in global conditions. However, firms remained cautious in their hiring and long-term capital expenditure plans and expressed concern about a potential fiscal crisis regarding the federal debt ceiling.


Overall, Third District manufacturers reported further increases in orders and shipments since the last Beige Book, although overall growth remained slight. Makers of food products, paper products, and fabricated metals reported gains. Producers of lumber and wood products, primary metals, electronic equipment, and instruments reported lower activity, much of it seasonal in nature. Reports were mixed for makers of industrial machinery. Overall, firms continued to report strong demand from auto- and residential construction-related businesses. Firms also reported some demand related to infrastructure repairs in response to Superstorm Sandy. Several firms reported difficulties meeting demand because of insufficient physical capacity, an inability to train new workers quickly enough, and/or customers’ expectations of shorter delivery times. A large supplier to a broad base of industry reported that business improved from early summer through early August, with larger backlogs in key segments.

Optimism has generally grown among Third District manufacturers that business conditions will improve over the next six months. A contact described U.S. manufacturing as “poised to grow” while citing signs of improvement globally, particularly in Europe and China. Some capacity expansion appears to be under way, as infrastructure projects that were being intentionally delayed are now coming on stream. Though generally positive, firms have lowered their expectations somewhat regarding hiring and capital spending plans since the last Beige Book.


Third District retailers reported modest growth overall since the last Beige Book, though results were mixed between outlets and traditional malls. Contacts said sales were soft in July, possibly dampened by excessive heat, but began to pick up in August with more back-to-school shopping. Sales of children’s apparel were stronger at outlets than at traditional malls, indicating that consumers were doing more price-shopping. Mall retailers were optimistic that sales would continue to pick up into the fall.

Auto dealers continued to report strong sales growth in July and the beginning of August. Pickup truck sales have been strong in the shore areas as rebuilding efforts continue. Contacts cited healthier household balance sheets, pent-up demand, and attractive leasing options as factors for strong sales. Dealers noted lean inventories as production has generally kept in line with demand. Dealers remain very optimistic, although their hiring continues to lag rising sales.


Overall, Third District financial firms continued to report modest increases in total loan volume. The most notable difference from the last Beige Book period was the further reduction in mortgage refinancing in response to higher interest rates. Contacts noted that demand for mortgages to purchase homes continued to increase modestly, as did demand for home equity lines and commercial real estate and C&I loans. Stronger increases were noted for most types of consumer lending, although credit card volumes fell off slightly. Contacts uniformly reported that small businesses remain very cautious, doing little or no borrowing for expansion and needed infrastructure. Credit standards have changed little, according to most banking contacts. However, many expressed concern about very tough competition on rates and terms - reflecting a “lack of reason,” according to one banker. However, most bankers reported that business was good overall and the credit quality of their loan portfolios was healthier. They remained “cautiously optimistic.”

Real Estate and Construction

Homebuilders throughout most of the Third District remained moderately busy with existing projects from spring sales. However, several builders reported a dip in traffic and new sales contracts in July, with modest sales growth resuming in early August. Higher interest rates were partly blamed for the lull: Locking in a mortgage rate now for an existing home appeared preferable to getting a mortgage later when the new home is completed. Sales of existing homes continued to grow at a moderate pace into August, according to residential brokers. A broker in the greater Philadelphia area described sales growth as “good steady improvement, not soaring.” Sales closed and sales pending grew by double digits (year over year) in some of the larger metropolitan areas in the Third District and by nearly double digits in a few others. The estimated months of supply of homes has risen since May in several areas, described as a seasonal trend rather than evidence that the shadow inventory of homes is emerging.

Nonresidential real estate contacts continued to report little change in the modest pace of overall leasing activity and slight growth of construction. However, architecture and engineering firms were seeing greater interest and increased workflow, which are expected to generate construction activity in the future. Meanwhile, general contractors reported that activity was very slow, with heavy competitive bidding on each project. New and ongoing projects continued to be heavily represented by industrial structures, institutional facilities, multifamily residential units, and public utilities. Market analysts observed a shift in recent leasing activity by large users of commercial space away from a contraction in square footage to some expansion. In addition, some companies are opening branches in the Philadelphia area market. Contacts remained generally optimistic for slow, steady growth.


Third District service-sector firms continued to report a moderate pace of growth overall. After a slow start to the summer, traffic counts, bookings, and boardwalk sales at shore destinations in Delaware and southern New Jersey picked up to a modest pace. A Delaware hotel group reported that its properties matched or exceeded last year’s record; another hotel reported that July was its best month ever. However, those parts of central New Jersey hardest hit by Hurricane Sandy continued to struggle, with low numbers of returning summer residents and tourists. Throughout the District, tourists continued to spend cautiously. Atlantic City casino revenue continued its years-long downward spiral.

Other service firms reported continued moderate growth, although some cited seasonal slowdowns for the summer. One staffing firm explained that its clients’ decision-makers are away for much of the summer. A large consumer firm anticipates higher activity in September following a typical August lull. Freight shipments have grown robustly throughout the District, tied to the expansion of intermodal facilities along the I-81 and I-76 corridors and to refinery activity along the Delaware River. Overall, service-sector firms remained optimistic about future growth.

Prices and Wages

Overall, price levels continued to increase slightly, similar to the previous Beige Book. Manufacturing firms reported that prices paid and prices received again increased modestly; the increases were even slighter this period than last. Auto dealers reported no changes in pricing. A mall operator noted apparel inflation in recent months. Builders continued to report land selling at a premium, rising land development costs, and difficulty finding qualified tradespersons. Most real estate contacts reported rising prices for lower-priced homes; price trends for higher-priced homes are closely tied to local market conditions. Recent safety regulations for truckers are expected to tighten capacity and spur higher prices this fall until more workers and new equipment are brought online. Generally, however, there are few wage pressures, according to most firms, including staffing companies.

SOURCE: Federal Reserve Board

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