Federal Reserve Bank of Philadelphia · Beige Book

Federal Reserve Bank of Philadelphia

Summary of Economic Activity

On balance, business activity in the Third District continued to grow slightly. Modest growth of broad nonfinancial services outweighed declines in manufacturing and some service sectors; in a few sectors, supply constraints obscured whether demand had declined. T1Employment continued to grow modestly, despite increased talk of a recession. Wage and price inflation subsided further for most firms but still remained at a moderate and strong pace, respectively. Most firms continued to note hiring difficulties and supply chain disruptions as their key challenges, while the rate of COVID-19 cases in the District has fallen by half and is currently lower than the national average. On balance, expectations for continued economic growth over the next six months remained positive but edged lower for all firms and were well below their nonrecessionary historical averages. Among manufacturers, although expectations turned negative, firms are hesitant to consider layoffs after struggling to rehire workers following the pandemic shutdowns.

Labor Markets

Employment continued to grow modestly. Scattered reports of layoffs, attrition, or hiring freezes have appeared as chatter about a future recession has increased. However, the share of firms reporting employment increases edged up to near one-third among nonmanufacturing firms and among manufacturers. Moreover, staffing companies reported no signs that job orders had slowed.

In fact, several contacts noted that manufacturing firms were hesitant to lay off workers, given the difficulty they have experienced rehiring after the pandemic closures. Looking ahead six months, the share of manufacturers that expect to hire more workers fell further to one-fifth from one-third in the prior period.

Overall, T2most firms still describe hiring and retention as challenges. A majority of firms reported that labor market problems had been a moderate or significant constraint to their second-quarter production. However, most firms have noted some easing of hiring challenges since the first quarter. In particular, retention is improving, and more workers are applying; however, labor quality and reliability remain poor. T3With the expectation that labor challenges will persist, contacts continued to note heavy investment in automation.

Most firms, including staffing firms, continued to note that wage growth is slowly subsiding. However, wage inflation remains widespread and appears to have maintained a moderate pace. In our monthly surveys, the share of nonmanufacturing firms reporting higher wage and benefit costs per employee has held steady at about three-fifths since April. Very few firms reported lower compensation, as has been true for the past year.

Prices

T4Prices appear to have continued growing at a strong pace. Price increases for manufacturers' factor inputs were less widely reported; however, more firms reported price increases throughout much of the downstream supply chain, including prices faced by consumers. Though the price increases were more widespread, comments tended to note that their rate had eased.

The share of manufacturers reporting higher prices for factor inputs fell to 70 percent, and the share receiving higher prices for their own products held steady at 52 percent. The share of nonmanufacturers reporting higher prices for their inputs rose to 80 percent, while the share receiving higher prices from consumers for their own goods and services rose to 38 percent.

T5A majority of firms reported that supply chain disruptions had been a moderate or significant constraint to their second-quarter production. While firms have noted an easing of supply chain problems since the first quarter, most firms remain uneasy about the disruptions.

Just over three-fifths of the manufacturers expect to pay higher prices for their factor inputs over the next six months. While still a historically high share, the percentage reached an all-time peak in January at nearly four-fifths and has fallen in four of the following five months. Also, just over half expect the prices they receive to increase – the lowest percentage since March 2021.

Manufacturing

T6On average, current manufacturing activity appeared to decline slightly. The indexes for shipments and new orders fell significantly, with new orders turning negative. Moreover, sentiment weakened further, as the index of current general activity also turned negative.

Likewise, the indexes for future general activity and future new orders both turned negative, while the index for future shipments fell to nearly zero. Nevertheless, manufacturing firms' expectations for future capital expenditures edged higher from the index's six-year low.

Consumer Spending

T7Retailers (nonauto) and restaurateurs reported a slight decline in overall sales – the first negative reports since early 2021. Contacts noted either less customer traffic or smaller purchases per visit, if not both. One contact noted that the firm would normally strive to increase traffic but currently can't staff up for it.

On balance, auto dealers reported little change to the weak level of sales observed during the prior period; sales remained significantly below the levels in 2019. The constrained supply makes it difficult to observe demand; however, some contacts feel that high prices and rising interest rates have reduced demand below the industry's potential capacity.

Overall, tourism grew slightly – at a slower pace than in the prior period. Continued improvements in business travel were offset by reported flattening of leisure travel and some cancellations of business meetings, especially in the tech sector. Many contacts noted that high gas prices and airfares had contributed to lower demand from leisure travelers, but contacts from some local properties noted rising competition from cruise lines and international tourism.

Nonfinancial Services

On balance, nonmanufacturing activity grew modestly – rebounding somewhat from the prior period's slight pace of growth. Overall, the share of firms reporting increases in sales and in new orders rose, while the share of firms that reported decreases edged lower in both categories.

Financial Services

The volume of bank lending (excluding credit cards) grew moderately during the period (not seasonally adjusted) – a similar pace as seen during the same period in 2019. However, growth was more balanced in 2019; now, individual loan segments are behaving much differently. Moreover, inflation is contributing more to the growth during the current year relative to past years.

Loan volumes grew at a moderate to strong pace for home mortgages and commercial and industrial lending. According to a lender, gains in the latter reflect a return to banks by borrowers who have found the current bond market too expensive. Contacts noted that rising interest rates and expectations of a slowdown have virtually eliminated growth in commercial real estate loans and home equity lines, while auto lending and other consumer loans grew slightly, at best. Credit card volumes appeared to continue growing moderately – a typical pace for this season of the year.

Real Estate and Construction

On balance, contacts reported that sales traffic and contract signings for new homes fell modestly, more so for high-end houses. One contact noted that customers were waiting for lower rates or lower prices.

T8Brokers noted that existing home sales continued to fall slightly, and that signs had emerged of a cooler market. While overall prices continued to rise on a year-over-year basis, one broker noted a significant number of price reductions in a recent 24-hour period. However, housing affordability remains a challenge, and rents remain high.

On balance, construction activity and leasing activity for commercial real estate continued to hold steady. The markets for industrial/warehouse space, multifamily housing, and institutional projects remained strong. Contacts are still waiting for clarity into the office market with the presumption of a further downward adjustment in space needs. However, the office market has been gradually adjusting through conversions to other uses.

For more information about District economic conditions visit: https://www.philadelphiafed.org/surveys‐and‐data/regional‐economic‐analysis