Beige Book Report: Philadelphia
December 9, 1970
There is general agreement among directors, bankers, manufacturers, retailers, and business economists in the Third District that the economy will remain sluggish through the end of the year. For 1971, there is cautious optimism for a mild pickup in business activity. However, few people that we talked with believe that the "worst of both worlds" situation will improve much next year. The consensus is that both unemployment and inflation will remain at unacceptable rates throughout the year. Because of this feeling among area businessmen, there is a growing willingness to try an incomes policy.
The level of business activity is expected to remain flat or decrease slightly through the end of this year, according to regional manufacturers. Our latest reading of business sentiment in the District shows that most area manufacturers experienced either no change or actual decline in sales and new orders for the month of November. For December, the consensus view is for no change in these key variables.
Looking ahead to 1971, however, optimism remains for at least a mild upturn in the economy. Most manufacturers say they expect volume to increase over the next six months. However, because the pickup in the economy is expected to be slow, area manufacturers are holding the line on capital spending plans. On the whole, the outlook for spending on new plant and equipment is for no change during the first half of next year.
Business and bank economists from the Philadelphia area also see no more than a mild pickup in the economy next year. They see housing and state and local spending as strong sectors next year, with defense outlays and capital spending as weak sectors. From their vantage point, they see the consumer as neither bull nor bear in 1971. Rather, they see consumption as only a ''so-so'' sector for next year.
Consumer sentiment in the Philadelphia area remains low. Dollar sales in large department stores continue to be down slightly from a year ago. In terms of physical volume, area department stores report that sales were off 10 percent last month. There was a two-day spurt in sales following Thanksgiving. But, for the most part, only bargain basement items sold. Higher priced goods simply are not moving so far in December, "sales have been terrible", as one retailer put it. There is near unanimity that Christmas sales will be poor. Further, area retailers see little encouragement in the outlook for early 1971.
Banks in the District report week loan demand. One consequence of this weakness has been some relaxation in what up to now has been a highly restrictive policy with respect to loans. For example, until recently one of the largest banks in the District required that one of four men approve any loan over $10,000. Now, the ceiling has been raised to $500,000. Despite this kind of relaxation in loan policy, area bankers remain sensitive to the creditworthiness of prospective borrowers, and the consensus among bankers seems to be that there will be no fundamental change in lending and investing behavior until expectations about the strength of the economy and about the stance of monetary policy are changed. With regard to monetary policy, District bankers interpret the most recent lowering of the discount rate as a technical move which they had anticipated.
Another consequence of the weakness in loan demand is the sluggish earnings that some banks say is shaping up for the fourth quarter. Most bankers also anticipate a drop in earnings for 1971. One large bank in Philadelphia reported that only 5 to 6 percent of its officers would be getting year-end raises.
There is widespread impatience with the current strategy against inflation. However, there is more disagreement now than a few weeks ago whether inflation or unemployment is the number one problem. One board member, for example, is critical of the way the recent "inflation alert" was handled. He thinks the President ought to be directly involved in spotlighting inflationary wage-price decisions. Another director believes that the Fed ought to resist the political pressures which are building up to ease monetary policy further. He believes that the Fed ought to stand firm until inflation is brought to heel. Other directors, however, are becoming increasingly concerned with rising unemployment. One director, for example, said that in his home county the sale of food stamps is up appreciably. Another director thinks that unemployment may be a more serious problem than inflation.
Although there is disagreement about whether unemployment or inflation is the number one problem, there is a growing feeling among directors and others that an incomes policy is worth trying. One director, for example, thinks the recent CED recommendations have merit. This board member is particularly disturbed that some top officials in the Administration rejected the CED proposal almost out of hand.