Beige Book Report: Philadelphia
January 14, 1976
Economic recovery in the Third District has still not developed any consistent strength. The manufacturing sector reports business activity virtually unchanged from last month, while retailers are enjoying brisk sales. Area manufacturers note that new orders are about the same as in December, and there is no measurable expansion or contraction in employment or the average workweek. Prices paid and received in this sector are higher, however, and there is some evidence that the rise in price is picking up. Despite the current sluggishness in business activity, manufacturers are optimistic in their outlook for the next two quarters. Retailers report very good sales, and they expect this to continue in the first quarter. Bankers in the area indicate that deposits are growing at more than a seasonal pace, but loan volume is soft.
Manufacturers responding to this month's business outlook survey report that business conditions are unchanged from last month. This represents a substantial slowdown from the pace of recovery in the regional economy last summer and early fall. In November 42 percent of the respondents reported an improved business climate, but in December this declined to 24 percent. This month only 14 percent of the executives surveyed feel that economic activity is at a higher level, while 66 percent observe no change. New orders are holding steady, with over half of the respondents indicating no change during the last month. Both employment and the length of the average workweek are also the same as last month. At the same time, liquidation of inventories—especially durables—continues, with over a third of those polled reporting fewer stocks on their shelves.
Despite the sluggishness in current activity, manufacturers remain optimistic for the next six months. Three fourths of the businessmen surveyed anticipate expansion. New orders are expected to be higher by July, and net accumulation of inventories is projected. The proportion of respondents looking for higher levels of inventories exceeds those expecting lower levels by 23 percentage points. This "net increase" in the six-month outlook is the largest since the middle of 1973. At the same time, employment is expected to grow as well. More than a third of the respondents plan to add to their work forces, and one fifth expect to lengthen the average workweek. In addition, one out of every three businessmen surveyed plans to increase spending for plant and equipment over the period.
Retailers in the area report that the strong surge experienced in Christmas sales has carried over into this month, and all of the merchants contacted expected it to continue at least through March. Traditional promotions on white goods and furniture are taking place, but all of the merchants contacted agree that the markdowns on many nontraditional lines that took place at this point last year are not necessary this year since sales are stronger and inventories are in better shape. One merchant notes that there is little evidence that shoppers are concentrating on lower priced items. "It's hard to believe, but we have sport shirts priced at $34 and they're selling like hot cakes". Some big-ticket items such as color TVs are also reported to be selling well.
On the inflation front, manufacturers report paying and charging higher prices this month, and the pace of inflation in this sector may be picking up. One half of the manufacturers polled report paying higher prices for their supplies this month, compared with a third noting increases last month. On the output side, 37 percent of those surveyed report receiving higher prices this month, compared with 28 percent in December.
The outlook for the next two quarters is for additional inflation. Almost 90 percent of the respondents expect to be paying more for their supplies over the period, and 60 percent anticipate higher price tags for the products they sell. Retailers report that prices continue to move up but at a moderate pace, and they look for this trend to continue over the next few months.
Area bankers report that loan volume remains sluggish. As one contact put it, "Loan volume is as soft as at any time in 1975". There is general agreement that no big pickup is in the cards through the first half of 1976. One banker expects total loans at his bank to grow about 7 percent this year. Bankers look for short- term interest rates to decline and then start moving up gradually around March. They anticipate a drop in the prime rate to 7 percent or below within the next few weeks before turning back up. The consensus is for this rate to average in the 7.75 to 8 percent range for the year as a whole. None of the bankers contacted foresee any problems in accommodating the expected increase in the demand for credit as the recovery proceeds. There is agreement that uncertainty over the staying power of the recovery is inhibiting many customers from making long-range borrowing commitments at this time. However, one banker reports that some of this uncertainty appears to be dissipating among his bank's corporate customers.