Federal Reserve Bank of Philadelphia · Beige Book

Federal Reserve Bank of Philadelphia

Summary of Economic Activity

On balance, business activity in the Third District has continued to increase slightly since the prior period. T1Consumer spending also rose slightly, despite price-conscious consumers; auto sales increased the most. Nonmanufacturing activity edged up, as it did last period, but manufacturing activity edged down—a reversal of its trend. Employment rose slightly this period—slower than the modest pace last period. Real wages and prices continued to rise modestly. However, T2most firms are expecting inflation pressure to increase because of anticipated fiscal, trade, and immigration policies. On average, firms expect moderate economic growth over the next six months. Optimism fell among all firms but remained more widespread among manufacturers than nonmanufacturers—the index for the latter slipped below its nonrecession average.

Labor Markets

T3Employment increased slightly, after rising modestly last period. Based on our December surveys, the indexes for full- and part-time employment narrowed slightly but remained positive for nonmanufacturing firms. The employment index for manufacturing firms also edged lower in December. The average workweek index edged higher for nonmanufacturers but fell sharply for manufacturing firms. Notably, for most of our employment indexes, over two-thirds of the firms reported no change in December.

Staffing contacts reported little change in the demand for their services and noted little wage pressure. Several contacts reported that their clients had imposed wage freezes, layoffs, or cutbacks on shifts. One contact noted that their firm had imposed a wage freeze on their own employees.

Many firms continued to note that finding skilled workers is a critical challenge. Employee retention has improved for most firms except those offering less than 14 dollars an hour (depending on the location).

Wages inflation continued to rise at a modest pace—typical of its long-run average. Several contacts noted that nominal wage increases of three percent or less were planned for 2025 (as much as five percent including benefits). One contact described a 10 to 15 percent increase for wages and benefits for the first year of a recently negotiated union contract. Planned increases would drop significantly in subsequent years.

Prices

On balance, firms' prices continued to rise at a modest pace. Contacts noted no relief for middle- and low-income families facing unaffordably high prices for houses and motor vehicles; however, many reported falling prices for food and fuel.

In our monthly surveys, the diffusion indexes for prices paid and prices received were at or above their nonrecession averages for nonmanufacturers and manufacturers. However, several contacts noted that their input costs had fallen, particularly for food commodities and for shipping. They also credit the drop in underlying fuel costs for some of the relief.

In December, manufacturers' expectations for future price increases over the next six months narrowed for prices paid and broadened for prices received compared with the prior month. However, both diffusion indexes remained more widespread than their nonrecession averages. Moreover, most contacts from all sectors continued to express caution about the impact of budget deficits, tariffs, and immigration policies on future prices.

Manufacturing

T4Overall, manufacturing activity decreased slightly after increasing modestly in the prior period. The indexes for new orders and shipments turned negative in December, and the general activity index fell moderately.

Manufacturers' expectations for growth over the next six months narrowed substantially for future activity, new orders, and shipments. Likewise, the indexes for future employment and capital expenditures fell. However, each of these future activity indexes remained at or above their nonrecession average.

Trade and Services

T5On balance, firms across a broad spectrum of nonmanufacturing industries continued to report a slight increase in activity. In December, the monthly index for new orders remained negative, but the indexes for general activity and sales/revenues remained slightly positive.

Retailers (nonauto) reported a slight increase in real sales—following no change in the prior period. Lower input costs allowed restaurants and retail grocers to lower retail prices and attract more customers. Contacts were optimistic that the uptick in demand would carry into 2025.

Auto dealers reported a modest increase in motor vehicle sales and that their inventories were nearing normal pre-pandemic levels. Contacts noted that normal levels also entail normal floor plan costs—narrowing dealer margins.

Tourism activity was flat to up slightly. Contacts noted that most segments of the travel industry have normalized following the disruptions from the pandemic. Now, the sector's demand growth appears to have reconnected to the rate of general economic growth. Overall, contacts were more optimistic for 2025.

The share of nonmanufacturers expecting growth over the next six months narrowed, with the index edging below its nonrecession average.

Real Estate and Construction

Brokers reported little change in existing-home sales but noted a bump up in new listings, steady traffic, and continued offers despite the holidays.

Homebuilders also reported no significant change in sales of new houses. One contact noted that December is typically slow but that 2024 had been a great year—adding that they entered 2025 with a large backlog of signed contracts and are already looking out one year and beyond.

Philadelphia area contacts described good demand and positive sentiment in the overall commercial real estate market. The retail and industrial segments were noted as especially strong with rising rents. Leasing activity for apartments remained resilient; however, the "current wave of new units will take years to digest." Contacts noted that the office market was just "marking time."

Commercial real estate contacts reported that construction activity decreased slightly this period. The pipeline of commercial projects continues to wane, and most of the federally funded public infrastructure projects still await groundbreaking.

Credit Conditions

T6The volume of bank lending (excluding credit cards) held steady for a third consecutive period (not seasonally adjusted)—weaker than the moderate growth observed during the comparable periods in 2022 and 2023.

District banks reported modest growth in home equity lines and slight growth in commercial real estate lending and home mortgages. These gains were offset by modest declines in commercial and industrial loans and in other consumer loans and by a slight decline in auto loans. Credit card volumes surged following slight growth during the prior period—typical for the year-end holiday season.

Banking contacts continued to report sound credit quality and relatively low delinquency rates. One contact noted that rising home values and larger, more frequent property insurance claims are driving taxes and insurance premiums higher, thereby triggering more mortgage delinquencies. However, in the former case, rising home values and the undersupply of housing make it easy for a delinquent homeowner to pay off the debt from the proceeds of a sale.

Contacts throughout the banking sector and the nonprofit community continued to warn that the high cost of housing and of automobiles further aggravates credit availability issues for low- and middle-income households.

For more information about District economic conditions visit: https://www.philadelphiafed.org/regional-economy.