Federal Reserve Bank of Philadelphia
Summary of Economic Activity
On balance, business activity in the Third District seemed to edge up after declining slightly last period. Consumer spending held steady, at best, with price-conscious consumers shopping carefully for deals or shopping less overall. Nonmanufacturing activity edged up slightly, and manufacturing activity rose modestly—a reversal of trend for both broad sectors from last period. Employment, real wages, and prices all rose modestly. However, inflation expectations rose for firms' own prices and for general inflation, with many firms expressing concern about the inflationary effects of potential tariffs. On average, firms expect moderate economic growth over the next six months—optimism was far more widespread among manufacturers than nonmanufacturers, although the growing confidence did not translate into more widespread capital expenditure plans for the former.
Labor Markets
Employment appeared to rise modestly, after rising slightly last period. Based on our October and November surveys, the indexes for full-time and part-time employment broadened modestly for nonmanufacturing firms. The index for manufacturing firms turned positive in November for just the third time this year. Notably, over two-thirds of both manufacturers and nonmanufacturers reported no change in employment in November. Both broad sectors reported an increase in the average workweek.
Staffing contacts reported steady demand for their services, with little wage pressure. Contacts generally described wages of $13 to $14 an hour as an effective minimum for their client firms—depending on the industry and the location. Firms offering less typically are experiencing high turnover.
In a broad annual survey of all of our contacts, 37 percent expected employment to increase over the next four quarters, 49 percent expected no change, and 13 percent expected a decrease. The net 24 percent of the firms that hope to hire is the same as last year, is the lowest share we've recorded dating back to 2011, and compares with an average of 40 percent.
Real wage inflation appears to have steadied at a modest pace—typical of its long-run average. Several contacts noted nominal wage increases of around 3 percent in 2024 or planned for 2025. Most contacts described little or no wage pressure and noted better labor availability and retention, but some described labor quality as a problem.
On a quarterly basis, firms' expectations of the one-year-ahead change in compensation cost per worker edged down to a trimmed mean of 3.4 percent in the fourth quarter of 2024, from 3.6 percent in the third quarter (and from a peak of 5.8 percent in the third quarter of 2022). Expectations averaged 3.2 percent before the pandemic. Expected compensation growth fell to 3.4 percent for manufacturers and to 3.5 percent for nonmanufacturers.
Prices
On balance, firm prices continued to rise but at a very modest pace. Firms reported that the price increases received for their own goods and services over the past year fell significantly. The trimmed mean for reported price changes, based on responses from all firms to our fourth quarter survey, fell to 1.7 percent from 2.5 percent in the third quarter. This is the smallest price change since the fourth quarter of 2020 (at 1.4 percent). Nonmanufacturers reported price increases of 1.5 percent; manufacturers reported 1.9 percent.
In our monthly surveys, the diffusion indexes for prices paid and prices received were below nonrecession averages for nonmanufacturers and were at or above for manufacturers. However, manufacturers' expectations for future price increases over the next six months rose significantly; the diffusion indexes were much more widespread than their nonrecession averages.
Looking ahead one year, the increases that firms anticipate in the prices for their own goods rose. The trimmed mean for all firms climbed to 2.8 percent in the fourth quarter of 2024 from 2.4 percent in the third quarter. The expected rate of growth was 2.6 percent for nonmanufacturers and 3.0 percent for manufacturers. However, a significant number of firms expressed the concern that tariffs would drive prices higher. The trimmed mean for inflation expectations was 3.3 percent for all firms in the fourth quarter of 2024—up from 3.0 percent in the third quarter.
Manufacturing
Overall, manufacturing activity increased modestly, after declining modestly in the prior period. The indexes for new orders and shipments were positive in October and November. The general activity index was positive on net, although it fell modestly in November.
Manufacturers' expectations for growth over the next six months became more widespread for future activity, new orders, and shipments; however, plans for future capital expenditures did not budge.
Consumer Spending
On balance, retailers (nonauto) reported little to no change in real sales—following a modest decrease in the prior period. Some contacts noted an uptick in customer traffic after an unusual summer slowdown, but most retailers and restaurateurs continued to describe their customers as highly price sensitive.
Auto dealers reported that increasing incentives have kept sales steady in the face of lagging demand for electric and other high-priced vehicles. Despite the incentives, vehicles are accumulating on lots—raising dealers' floor plan costs and further cutting into profits.
On balance, tourism activity held steady. "In pretty good shape," according to one contact; "plodding along," according to another. Some sectors are still described as normalizing after the pandemic, while demand for budget motels continued its recent slump.
Nonfinancial Services
Nonmanufacturing activity sparked in October only to settle back to little to no growth in November. The index for new orders returned to a slightly negative reading, while the indexes for general activity and sales/revenues were slightly positive.
Nonmanufacturers' perceptions of general activity for the region flirted with a positive outlook in October before returning to a negative reading in November.
The index of expectations among nonmanufacturers for their own growth over the next six months broadened further—reaching its nonrecession average.
Financial Services
The volume of bank lending (excluding credit cards) held steady for a second consecutive period (not seasonally adjusted) – weaker than the slight growth observed in the comparable period in 2023.
District banks reported little change in commercial real estate lending, auto loans, and other consumer loans. A moderate increase in home equity lines and modest gains in mortgages and in commercial and industrial loans were offset by declines in other miscellaneous categories. Credit card volumes grew slightly following two periods of little growth—volumes grew moderately during the same period one year ago.
Banking contacts continued to report strong credit quality and low delinquency rates. However, contacts throughout the banking sector and the nonprofit development community continued to underline the growing distress caused by the ongoing housing affordability problem, now joined by increasingly unaffordable automobiles.
Real Estate and Construction
Brokers reported that existing-home sales held steady after edging higher last period. The market remains tight, with near record-low inventories and "winning" bids above the asking price.
Homebuilders continued to report steady sales on average over the past few months. Sales trends shifted as mortgage rates fell and rebounded, prompting some builders to offer rate buydowns to prospective buyers.
Contacts from the Philadelphia area describe an office market struggling to reach a new equilibrium. Meanwhile, the multiyear buildup of new multifamily apartments throughout the Third District is now fostering competition for renters with an increase in signing incentives.
Commercial real estate contacts reported modest declines in construction activity, as the pipeline of commercial projects wanes and the buildup of public infrastructure projects—many still in the design/plan phase—awaits groundbreakings. Contacts roughly outlined a one- to two-year gap before construction employment ramps up.
For more information about District economic conditions visit: https://www.philadelphiafed.org/regional-economy.