Bloomberg News

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

June 06, 2012

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

THIRD DISTRICT - PHILADELPHIA

Overall, business activity in the Third District continues to improve, but the pace has slowed slightly in most sectors since the previous Beige Book. Manufacturing activity has eased slightly, but most major manufacturing sectors continue to grow. After a strong first quarter, partially due to the unseasonably mild weather, retail sales slowed somewhat in April but appear to be gaining strength based on customer traffic in May. Although sales remain strong overall, motor vehicle dealers also reported softer sales in April. Third District banks report steadier growth in lending and continued strong credit quality since the last Beige Book. Demand for new home construction has eased off a bit, but brokers report stronger sales of existing homes. Several signs of improvement were cited by commercial real estate contacts. Overall, service-sector firms report continued growth. Price pressures have eased slightly in some sectors since the last Beige Book.

The outlook remains optimistic, but more firms readily noted the slow pace of the recovery relative to the sunnier views expressed in the last Beige Book. Manufacturers’ expectations for the next six months, although diminished, remain positive. Retailers continue to expect steady improvement. Auto dealers anticipate continued strong sales. Banking, real estate, and service-sector firms are slightly more optimistic but continue to plan for slow growth in 2012. In general, business plans reflect caution, and businesses have resumed a more realistic perspective on the limitations of the current recovery and the risks to its longevity.

Manufacturing. Since the last Beige Book, Third District manufacturers have reported virtually no change in shipments and just the slightest decline in new orders. Gains continue among the makers of food products, lumber and wood products, fabricated metals, industrial machinery, and instruments. Firms in the primary metals and electronic equipment industries report a fall-off in demand. According to various contacts, growth is attributed to warm weather, automotive demand, production returning from China, Marcellus Shale activity, and renewed customer optimism.

About eight out of 10 Third District manufacturers expect business conditions to improve or stay the same during the next six months - somewhat less optimistic than reported in the last Beige Book. Except for primary metals, optimism is present in all major sectors. Firms seem relatively divided as to whether high energy costs are a concern, depending largely on their ability to pass the cost along to their customers. New to the list of concerns and uncertainties about the outlook is the increasing worry that political gridlock will lead to large cuts in defense-related production through sequestration. While caution remains, firms have reported a little more optimism as have their customers. However, manufacturers have expressed somewhat lower expectations of future capital spending and future hiring since the last Beige Book.

Retail. Third District retailers reported that the surprising early sales gains held up through March, then fell back some in April. Year-to-date, gains have remained positive through April. Sunny weather has continued to boost traffic in May; bus counts at outlet malls are nearly double last year’s level. Small businesses in less urban markets are struggling as consumers adjust to higher gas prices by cutting retail purchases. Retail contacts remain cautiously optimistic.

Auto sales in Pennsylvania shifted from strong in March to moderately strong in April. Very low borrowing costs for inventories have helped to support dealers’ profitability. A large New Jersey dealer reports that retail auto sales are off year-over-year through April but that fleet sales are strong. Profits are also off. The dearth of auto sales in recent years has created a slump for dealer service sales; they must compete harder to retain customers with aging cars that typically are taken to independent garages. The outlook for auto sales remains positive. Hiring remains spotty and depends on brands carried, fleet business, and local economic conditions.

Finance. Overall, loan volumes have continued to grow in the Third District since the previous Beige Book. While activity remains uneven, banks report increasing signs of a steady recovery. Loan demand continues to be strongest for inventories and capital equipment to manufacturers and for investments in the higher education, health care, and technology sectors, and in multifamily housing. Most contacts report solid credit quality.

Real Estate and Construction. Residential builders report some softening in May traffic and sales due to a combination of typical seasonal slowing and a drop-off from the atypically strong first-quarter sales. Construction crew members for one Pennsylvania builder are working 45 to 70 hours per week; the builder is hiring cautiously as the builder’s pace of activity slowly picks up. Residential brokers report “seeing genuine improvement”: Year-to-date sales through mid-May exceed last year’s and are over plan. A broker reported that much of its workforce operates on a shortened week, and it will exploit this substantial excess capacity before hiring more staff. The outlook among builders and brokers remains positive.

Nonresidential real estate activity has been generally positive since the last Beige Book, with several contacts citing increased leasing activity throughout the District, including southern New Jersey. Despite ongoing demand, Philadelphia’s Center City office market has slowed a bit, as the bulk of existing class-A trophy space is now under agreement. Several contacts also cited a few large build-to-suit projects that have gone to bid and are awaiting approvals before construction begins. Other contacts noted reluctance among transportation contractors to hire more workers, given the uncertain future of public infrastructure funding due to the increasingly short funding horizon of the federal transportation authorization bill. The overall outlook for nonresidential real estate has brightened slightly since the last Beige Book.

Services. Third District service-sector firms have generally reported positive growth since the last Beige Book. Job postings have risen at area universities, local advertising sales have been strong, and area theme parks are attracting increasing numbers of foreign visitors (notably from China). Contacts note little recent change in defense-related activity; however, concerns are mounting that significant federal spending cuts on defense and civil contracts may result from sequestration or its alternative, political compromise. Employers continue to make liberal use of staffing firms; however, staffing contacts report that employers’ sense of urgency to fill specific slots is often low. Overall, service-sector firms retain a positive outlook for growth through the remainder of the year.

Prices and Wages. Price levels have eased slightly since the previous Beige Book and remain generally constrained. Industry contacts indicated that gas prices have stabilized and are expected to ease through the summer. Manufacturing firms report lower cost factors since the last Beige Book. Home builders anticipate cost increases for materials if activity picks up more quickly; however, the current gradual pace of recovery may allow suppliers to adjust without severe cost increases. Retailers and home builders continue to report tight margins. Contacts continue to report a lack of wage pressures, other than for medical benefits. House prices have stabilized in many areas for low-end homes but have fallen further for high-end homes.


Steve Ballmer, Power Forward
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