June 2, 1971
The general mood of businessmen, bankers, and economists in the Third District is that the recovery is continuing but at a gradual pace. Caution is still dominating inventory and plant and equipment decisions. Some step-up in hiring plans is occurring at the manufacturing level. On balance, inflationary expectations seem to be somewhat stronger than they were a few weeks ago. Bankers expect long-term rates to rise further. The mood of manufacturers in the Third District is generally optimistic. Most of them believe the economy will continue to expand. For the immediate weeks ahead, they forecast an upward trend for new orders and sales. However, they remain cautious about building inventories and boosting outlays for new plant and equipment.
Increased business activity apparently is beginning to have an expansionary impact on hiring plans for District manufacturers. Since early 1970, more area manufacturers were laying off more workers than they were hiring. For most of the second half of last year, the percentage laid off was substantially greater than the percentage hired. This gap began to close earlier in 1971. For the last two months, the number of manufacturing firms adding to their payrolls has equaled the number cutting back. Nearly four times the number of manufacturers who were polled plan to increase the number of employees six months from now as plan decreases.
Inflationary expectations, however, continue to be very much alive. One director believes they are actually increasing. He says costs are rising rapidly and are exerting upward pressure on wholesale prices. Sooner or later, he says, prices at retail will begin accelerating again. There is fairly widespread acceptance of this view. Most businessmen that we talked with believe that inflation is still the number one economic problem facing the nation.
A sampling of business economists in the Philadelphia area indicates that most are still forecasting a $1,045-1,050-billion GNP for 1971, with an unemployment rate near 6 percent at year-end. There is some disagreement, however, on the outlook for inflation. One group believes that a gradual recovery with lingering unemployment will be enough to dampen the pace of upward price movements. The other group contends that wage-push pressures are simply too great to be checked, even with the amount of excess capacity that is likely to prevail for the balance of the year.
Loan demand at banks is still on a very modest upward path. Most bankers we talked with anticipate that long-term rates will move up further. The reasons cited most often are a continuation of rising loan demand and the belief that inflationary expectations will intensify rather than abate. One country banker said he feels so strongly about higher rates that he wouldn't touch a 20-year mortgage for less than 8 1/2 percent.