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 slowed to a modest pace of growth during this current Beige Book period (beginning with the last week of August through the first partial week of October). The slowdown was most evident in the housing sectors - existing home sales slowed to a modest pace of growth, while homebuilders saw sales, traffic, and new contracts decline; however, construction continued at a modest pace. Other sectors that continued to expand at a modest rate included general retail sales, tourism, staffing services, and commercial real estate leasing. Commercial real estate construction continued to expand only slightly. Meanwhile, manufacturing activity improved to a modest pace of growth. Two broad sectors grew at a more than modest pace: Auto dealers continued to report a strong rate of sales growth, and moderate rates of growth continued for general services. Loan volumes at Third District banks grew at a modest pace across most categories, and credit quality continued to improve. Contacts reported little change to the slight overall increases in wages, home prices, and general price levels - similar to the last Beige Book period.

Despite a slower pace of growth in some sectors, contacts overall maintained an outlook for moderate growth - similar to the last Beige Book. The housing recovery has softened somewhat for existing home sellers and new homebuilders, and builders are less optimistic. However, contacts in other sectors continued to express confidence in the underlying economy. In particular, manufacturers and service-sector firms expressed greater confidence in the U.S. economy and in global conditions. In regard to hiring and capital expenditure plans, firms continued to expand cautiously, as they face ongoing uncertainty from the federal government shutdown and implementation of the Affordable Care Act.


Overall, Third District manufacturers have reported a significant rebound in orders and shipments for a modest pace of growth since the last Beige Book. Over one-third of firms reported growth. Producers in nearly all sectors of durable and nondurable goods reported stronger activity. The chemicals and allied products industry was a notable exception. Overall, firms continued to report strong demand from auto- and residential construction-related businesses. Numerous firms reported growing demand for exports to Europe, China, and/or South America. However, one large industrial supplier reported continued growth through August, then softening in September.

Optimism that business conditions will improve over the next six months has broadened among Third District manufacturers. Contacts expect foreign and domestic demand to increase. Consequently, expectations of hiring and capital spending plans have largely rebounded since the last Beige Book, including more talk of “reshoring” of production that had gone overseas. However, several firms expect to deploy more capital than labor to meet higher production levels. The federal government shutdown has reignited concerns about fiscal drag, which is of most concern to smaller firms. Otherwise, the U.S. economy is still “poised to grow.”


Third District retailers have continued to report modest growth overall since the last Beige Book. Sales in August were generally stronger than in July, especially at outlet malls; sales at traditional mall retailers softened somewhat in the second half of August and then ticked up in early September after most schools had resumed. Convenience store retailers reported similar results but noted softness in discretionary purchases and a reliance on promotions and discounting. Hiring plans reported by area retailers for the 2013 holiday season were generally equal to or greater than last year’s - reflecting similar expectations for sales. Some retailers plan to add seasonal workers earlier in what appears to be an effort to extend the shopping season, since the traditional holiday period will be six days shorter than in 2012. The optimistic sales expectations generally assume that the federal government shutdown does not extend beyond two weeks.

Auto dealers reported that August was a “killer” month; however, year-over-year comparisons were boosted by stealing an extra Saturday from September compared with last year. September sales were reported as still very strong, although the lost weekend may account for a little dip from August’s pace. In addition, sales slowed for some dealers as they grew low on inventory. Dealers continued to report good prospects for future 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 a slight drop in commercial real estate loan volumes. Contacts noted that demand for mortgages to purchase homes continued to increase modestly, as did demand for home equity lines and C&I loans. Stronger increases were noted for most types of consumer lending, although volumes for credit cards fell off slightly. Some bankers indicated that home equity lines were being used to pay off remaining low mortgage balances. However, with the rise in interest rates, a mortgage servicing company indicated that prepayments were starting to slow. While some contacts reported growth of activity from medium-sized companies, most continued to report that small businesses remain very cautious. Many banking contacts expressed concerns about aggressive competition on rates and terms, suggesting that credit standards may have eased a little. Overall, most bankers remained optimistic, although they expressed uncertainty on behalf of their business customers and for themselves over the implications of both the Affordable Care Act and a prolonged government shutdown.

Real Estate and Construction

Third District homebuilders reported mixed results in August - from weak demand to “finished strong.” However, by the end of September, most builders reported that traffic was down and that very few contracts for new construction had closed. Builders assigned only partial blame to rising interest rates, stressing as well that the pool of potential buyers has been culled by weakened consumer confidence. The recent slowdown has caused builders to adjust their outlook lower. General residential construction activity continues to grow slightly from prior sales. Also, other contacts reported strong demand for home renovations. A final tally of existing home sales also indicated a slower year-over-year pace of growth in August than in July, according to many residential brokers. Sales closed and sales pending barely hit double-digit percent increases (year over year) in a few of the Third District’s larger metropolitan areas; the metrics were worse in other areas. Homes sold were nearly flat in the Harrisburg area and fell in the Lehigh Valley. Sales pending grew a mere 2 percent in the Greater Philadelphia area.

Although little change was indicated by nonresidential real estate contacts in the modest pace of overall leasing activity and slight growth of construction, their outlook improved overall. Architecture and engineering firms continued to see stronger interest and workflow. The resurgence of Philadelphia-area refineries continued to reignite strong construction and maintenance operations. Leasing agents, management companies, and commercial market analysts are increasingly upbeat over the steady progress in various sectors and locations within the Third District.


Third District service-sector firms continued to report a moderate pace of growth overall; staffing firms and tourism maintained a more modest pace. Parts of the Jersey shore experienced lighter traffic this season. Hotel activity was on par with previous seasons; however, longer-term rentals were down, suggesting that tourists kept their visits short. A Delaware shore realtor reported slow but steady sales in August and September; however, the realtor did not see the pickup in rentals he was expecting during the summer season.

Other service firms continued a moderate pace of growth overall. A large IT firm reported a very strong increase in sales as “the floodgates opened over the last year.” Another large service firm reported continued moderate improvement in its base business and an increase in new business from last year. A third large firm reported “not much has changed - a point or two on the softer side,” but still growing and doing great. 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 moved higher again; the increases were more widespread this period than last. However, auto dealers and general retailers reported little change in pricing, and builders reported holding prices steady. Most contacts report coping with extremely tight margins. Generally, real estate contacts continued to report rising prices for lower-priced homes, while higher-priced homes are aligned to local market conditions. Some contacts reported high-cost increases for employees’ health insurance coverage. However, very few contacts are seeing wage pressures, other than for a few highly skilled occupations.

SOURCE: Federal Reserve Board

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