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Economic activity in the Fourth District expanded at a slow pace since mid November. Overall, manufacturing output remained steady though production at auto assembly plants declined. Residential builders reported new home sales were very weak while commercial contractors experienced an increase in their backlogs. Sales by District retailers were below plan. Demand for business and consumer loans was flat to declining and the number of delinquencies rose slightly. Reports on credit quality showed some deterioration, especially on the consumer side. Oil and gas production was steady to increasing, although drilling activity fell slightly. And truck freight volume was characterized as soft.
Employment levels across the District were largely unchanged. Staffing firms reported a modest increase in the number of job openings while the number of job seekers was flat. Demand was greatest in the health care and nonprofit sectors. Little upward pressure on wages was noted. Manufacturers reported increased costs for raw materials. Several producers reported raising their prices in response to rising input costs and others are planning to increase prices early in 2008.
Manufacturing
In general, manufacturing output has been steady over the past six weeks. Reports of increased production were offset by slowdowns attributed to seasonal adjustments or exposure to residential construction. On a year-over-year basis, reports were evenly split between increasing and declining production. Looking forward, almost all of our contacts anticipate output to remain at current levels or to increase.
Steel shipments were mixed. Half of our respondents said volumes were higher than expected; others cited lower volumes but attributed them to seasonal factors. The strongest end markets for steel included transportation, energy, and defense. Auto assembly plants within the District reported lower production numbers during November. Foreign nameplates and their domestic counterparts shared in the decrease. In terms of year-over-year comparisons, auto production was flat.
Reports on capacity utilization were mixed. Further, capital spending remains on plan with several producers saying they expect to increase expenditures during 2008. Reasons cited include increased productivity, new product development, and equipment replacement. Almost half of our respondents reported increasing prices for raw materials. Further, several told us that they have raised their prices during the past six weeks, and more than half said they have plans to raise prices in the near future. Most manufacturers also expect modest inflationary pressures to continue. On balance, there was little change in employment levels; however, several contacts said they plan to resume hiring in 2008. Little wage pressure was reported.
Real Estate
Most home builders reported very weak sales over the past six weeks. However, one contractor in the central part of the District noted that construction was above projections for November. Sales continue to be down year-over-year. Looking forward, builders believe activity in 2008 will mirror that of 2007. Home prices were steady, and half of our respondents told us that they continue to use discounting as a means of selling homes. On balance, material costs were stable. Two contractors told us that they have reduced the size of their workforces since our last report. Further, additional layoffs are possible if business continues to deteriorate. Concerns about labor costs were limited to increases for health care coverage.
Commercial contractors reported that business has been stable to increasing since our last report and on a year-over-year basis. Looking forward, nearly all contractors said that they expect activity in 2008 will be at a higher level than in 2007. Further, all respondents noted a pickup in backlogs. For the most part, material costs were stable. Workforce levels remain largely unchanged; however, a few builders said they may add workers in 2008. No wage pressures were reported.
Consumer Spending
Overall sales by District retailers were flat to declining during November, with most retailers expecting sales to remain flat during the first quarter of 2008. However, one large discount chain reported rising sales with the expectation that the increases will persist during the next few months. Auto dealers reported a decline in sales of new and used vehicles during the past six weeks, and they anticipate flat to lower sales in the coming months. Vendor prices were steady to increasing during the past six weeks; increases were largely limited to food products. Employment levels were adjusted to meet seasonal demands. And capital expenditures remain as projected with little change anticipated during 2008.
Banking
A majority of bankers described business and consumer lending as flat to declining during the past six weeks. Any increases on the business side were generally limited to commercial real estate. The residential mortgage market remains very sluggish with little expectation for any improvement during the next six months. Further, most respondents characterized auto and home equity loan demand as slow. Almost all bankers reported no change to slight growth in core deposits. Net margins were either stable or had narrowed. In general, credit quality for business customers was stable while consumer quality deteriorated. Half of our respondents reported an increase in delinquencies, especially for real estate loans and home equity credit. On balance, employment levels were stable. Two bankers reported some wage pressures which they attributed to difficulty in recruiting qualified workers.
Energy
Oil and gas production has been steady to increasing over the past six weeks, although several producers noted a slight decline in drilling activity due to seasonal factors. Reports on coal production were mixed. Little movement was seen in prices received for coal, oil and natural gas and in the cost of materials and equipment. In general, capital expenditures remain on plan. Looking forward, half of our respondents reported that they plan to increase capital spending during the next few months. Employment levels were largely unchanged. Most producers reported some wage pressures, especially among experienced workers.
Transportation
Trucking executives characterized freight volume as soft over the past six weeks. Looking forward, they anticipate 2008 will be a challenging year with little rebound in business activity until the second quarter at the earliest. Shipping prices remain very competitive while fuel prices continue to rise; however, most carriers are able to recover some of the increased cost through surcharges. Capital expenditures were also characterized as soft with little improvement expected in the upcoming months. Carriers told us that they are unwilling to spend in the current economic environment. On net, employment levels continue to decline slightly due to layoffs, and little wage pressure was reported.
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Philadelphia