Beige Book Report: Philadelphia
November 11, 1970
Information from directors, bankers, manufacturers and retailers suggests that corporate liquidity will remain a major problem in 1971, especially for lower quality borrowers. Overall business expectations remain bearish. More unemployment is anticipated. Finally, some directors believe that an incomes policy will be necessary if inflation is to be controlled without a significantly higher rate of unemployment.
A poll of top financial officers of the nation's largest firms indicates that corporate liquidity is still a big problem for a majority of firms. Nearly 40 percent of the firms say they plan to reduce short-term liabilities in 1971 in an attempt to upgrade their liquidity positions. About one-half of the firms planning to reduce short-term liabilities are counting on an increase in profits as a source of funds. Another 30 percent are counting on the sale of long-term bonds, with the remainder using equity sales and bank borrowings for refinancing long.
Although most firms are optimistic about improving their liquidity positions, there is more optimism on the part of lower quality borrowers than among those with top credit ratings. At the same time, talks with bankers and others in the financial community in recent weeks suggest that credit worthiness is likely to remain a major concern of lenders.
Although banks remain concerned about their own liquidity positions, they are backing away a bit from the severe lending restrictions they have imposed up to now. One Philadelphia bank, for example, is making an intensive analysis of its loan portfolio to determine how much more accommodative it can be to corporations that do not have access to long-term capital markets, but are anxious to refinance long some of their short-term liabilities. As of now, large commercial banks in Philadelphia do report some lengthening of their portfolios; however, they are quite reluctant to go out beyond a year or two.
Overall economic activity will remain soggy for at least several months, according to Third District manufacturers and retailers. Manufacturers report that new orders, shipments and unfilled orders are likely to remain soft in the coming months. One director, who is also the head of a large manufacturing firm, believes that the underlying trend in the economy is weaker than is generally acknowledged. He says too much sluggishness is blamed on the General Motors strike.
Large department stores in the Philadelphia area also report that business is slow. Sales volume is weak across the board from clothing to cosmetics to household goods. Only items with substantial markdowns in price seem to attract buyers. One retailer noted that because of excess capacity among clothing manufacturers, substantial price shading is occurring at the wholesale level. He pointed to suits, coats, and lingerie as examples.
The hiring plans of both retailers and manufacturers in the Third District suggest further rises in the unemployment rate. Overwhelmingly, manufacturers plan either to cut back or hold the line on hiring during November and December. Retailers plan less than seasonal build ups in their staffs as well.
Considerable concern is expressed by some directors about the impact of the automobile settlement on inflation. One director, whose company is a supplier to the automobile industry, reports that from what he hears a very substantial settlement is in the works. Elsewhere in the District business community, inflationary expectations remain very much alive as well. Several directors believe that an incomes policy will be necessary in the coming months. They do not believe that monetary and fiscal policies alone can combat rising unemployment without losing around against inflation.