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The District's economy showed modest growth in July and early August, but growth was mixed and the outlook less certain due a continuing slowdown in auto production and residential construction. Most District manufacturing contacts reported steady production in the six weeks ending in mid August, although their outlook has dimmed somewhat. Retailers experienced mixed sales activity with high gasoline prices most often cited as the reason for any declines. Commercial builders reported strong backlogs and an increase in customer inquiries, while new home sales continued to be weak. Commercial and consumer borrowing was generally characterized as steady. And the strong demand for trucking and shipping services seen for the past year has begun to moderate.
On net, hiring across the District was steady. Staffing firms reported job openings in Ohio and Pennsylvania continued to moderately increase with demand coming from the professional business services, healthcare, and defense sectors. Wage pressures were not seen as an issue at this time. Although many contacts reported increased input costs related to petroleum, metals, and healthcare, several noted that the rate of increase seems to be slowing. Most manufacturers attempted to pass these costs along to their customers with a mixed degree of success. Retailers generally reported holding their prices steady.
Manufacturing
Since mid July the District's durable goods manufacturers reported steady production, at levels above those of this time last year. Steel producers characterized demand as good (if weaker than earlier in the year) with strong growth in stainless steel among capital goods and appliance manufacturers and customers in the chemical and energy business. District auto production weakened over the last six weeks as well as on a year-over-year basis. Some of the decline is attributed to a seasonal lull, but production levels for the next six months are anticipated to be below those reported for the first half of 2006. The overall outlook for manufacturing is mixed with slowing demand in the auto and housing industries and continued strength in capital goods. Although most contacts reported very little or no idle capacity, few durable goods manufacturers are expanding their capital spending plans. Only about half the producers contacted said they were able to successfully pass on increased costs for energy and metals through higher prices. Hiring has been relatively flat; however, fewer contacts than earlier in the year anticipate much hiring in the near future. Wage pressure remained limited.
Production at the District's nondurable goods facilities has been steady since mid July with mixed results on a year-over-year basis. Expectations for the next six months are also mixed. Most producers reported idle capacity and only a few planned to increase their investment spending. None of the contacts reported increasing employment in the past six weeks and only two said they plan to hire in the near future.
Retail
Sales by District retail contacts were mixed since mid July with most citing high gasoline prices as having an impact on disposable income. Apparel retailers reported their sales were flat to declining; however, sales were close to expectations. Grocery stores saw modest gains while drug stores reported very strong sales especially from prescriptions, cosmetics, and convenience foods. Finally, some restaurant owners experienced a large drop in customers citing high gas prices as the reason.
Several contacts noted their costs are rising due primarily to energy prices and healthcare expenses, although several also said that the rate of increase in healthcare expenses has slowed; nevertheless, product prices were holding steady to showing only modest increases. Most retailers noted no unusual hiring plans.
New car sales were mixed with foreign plates generally doing better than domestics. On a year-over-year basis car sales are down significantly due to the success of last year's employee pricing program. SUV sales also showed a dramatic decline with dealers blaming consistently high gas prices.
Construction
New home sales continue to be weak with 80 percent of contractors reporting softer sales on a year-over-year basis. A number of builders have curtailed or stopped spec home building and continue to offer discounts as a means of enticing buyers. Most contacts expect sales to remain soft for the remainder of the year with 2006 totals to be below those in 2005. Almost all homebuilders report material costs have increased but not significantly. Many noted increases in electrical and plumbing supplies due to increased copper prices while about half saw a decrease in lumber costs. Three of the larger builders laid off workers over the past several months; otherwise, direct employment was relatively unchanged.
The District's commercial contractors all reported an increase in business on a year-over-year basis and that customer inquiries were up since mid-July. The majority of builders also reported strong backlogs. Among the segments where sales remained robust were health care and manufacturing. Retail (specifically foreign-nameplate auto dealerships) and municipal utilities saw a pickup in construction activity. Material costs reportedly continued to rise across the board. Copper and petroleum-related products increased significantly while more modest increases were reported for steel and concrete. Most builders can pass these price increases through to their new customers, but aren't able to adjust existing contracts. Contractors reported little change in the size of their labor force.
Banking
At District banks, both commercial and consumer borrowing remained steady or was slowing since early July. Auto loan demand was characterized by all contacts as being soft. The mortgage market has contracted due to recent increases in interest rates and an excess inventory of unsold houses. Most mortgage activity was due to refinancing as consumers moved from ARMs to fixed rate mortgages. While credit quality remains strong, most bankers reported a slight increase in delinquencies which they attributed to a few large commercial accounts. Finally, nearly all contacts reported a gain in core deposits driven primarily by commercial activity.
Transportation
Demand for trucking and shipping services has moderated since mid July with a slight decrease in volume of freight on a year-over-year basis. High fuel costs remain a concern with trucking companies continuing to pass on these costs to end-users using surcharges. However, there are scattered reports of customers wanting to negotiate down the surcharge. An upward movement in wages was reported by a majority of the contacts. Reasons cited include a driver shortage and labor contracts.
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Philadelphia