February 11, 1976
Economic activity in the Third District has picked up in February. The manufacturing sector, which was just marking time in January, shows modest expansion this month and retailers report strong sales. Manufacturers in the region indicate that new orders are higher and inventory liquidation has been halted. At the same time, employment is about the same as in January and the workweek is fractionally longer. Prices in this sector are higher, but the reported increases are not as widespread as they were last month. The outlook in manufacturing for the next six months is for continued expansion. Area retailers are enjoying brisk sales and envision a healthy sales picture over the coming months. Bankers report that loan volume remains basically flat.
District manufacturers, responding to this month's Business Outlook Survey, report a modest improvement in business over last month. Of the businessmen surveyed, 21 percent indicate improvement while 72 percent report no change. New orders are up this month for the first time since November, and the level of inventories is unchanged for the first time since the fourth quarter of 1974. This steadiness in inventory levels is reported for both durables and nondurables. At the same time, jobs in manufacturing are holding steady, and the workweek is fractionally longer. Here, weaknesses in durables are offset by gains in nondurables.
The outlook in manufacturing for the next six months is optimistic. More than 8 out of 10 executives polled expect a higher level of economic activity by August. A similar proportion anticipate an increase in new orders over the period and more than one-third project net accumulation of inventories. At the same time, these businessmen look for gains in employment. Close to half of the respondents expect to add to their work forces, and almost one-third plan to lengthen the average workweek. Increases in spending for plant and equipment are anticipated by 4 out of 10 respondents. This is a continuation of a gradual upward trend in planned capital expenditures which began last October.
Retail executives report that current sales are running well ahead of the same period last year. In addition, all of the merchants contacted indicate that present sales levels are above their expectations for this period. In general, the strength in sales at most stores is reported to be broad-based, but certain items are singled out as strong sellers. For example, one retailer notes a resurgence in lower-priced durables such as small electrical appliances priced under $50. He adds, however, that the bulk of the strength is in soft goods, especially apparel. In general, retailers in the area are optimistic about the next several months and there is little expectation that sales would suffer much if the proposals for substantial increases in Philadelphia taxes were enacted. One merchant indicates that a bullish forecast for his stores' sales made last November will probably be revised upward in the near future. In addition, all of the retailers contacted feel that inventories are better-balanced than they were during most of 1975.
On the price front, manufacturers report that prices are up for goods they buy as well as for those they sell. However, the increases are not as widespread as they were in January. This month, for example, only one-third of the respondents are paying higher prices for their inputs while close to one-half were experiencing increases last month. Similarly, 19 percent of the executives polled in the latest survey indicate higher prices for the products they sell—down from 36 percent in the previous month. The outlook for the longer term is for additional inflation. Nine out of ten respondents expect to be paying more for supplies six months from now, and almost 2 out of 3 anticipate higher prices for their finished products. Retailers in the area note that while prices of inputs and outputs are both higher, there is "continued moderation" in the rate of increase. One merchant expects a highly competitive retail environment in '76, and as such he feels that it will be difficult for retailers to raise gross margins by raising their prices faster than costs.
Bankers in the District report that total loans outstanding are essentially flat. At one bank, however, loan volume is reported to be declining and below levels forecast in December 1975. There is general agreement that the weakness is in the business loan component. One executive notes that competition is much keener now than it was a few months ago. Last November an offer by his bank of 90-day loans at below-prime rates elicited a strong response. A similar offer recently has not added one cent to the volume of loans outstanding. The majority of bankers contacted look for an expansion in loans to begin sometime in the second quarter with slightly over 10 percent growth for the year being a frequently-mentioned expectation. The consensus is that consumer loans will grow faster than C&I loans. None of the bankers contacted expects short-term interest rates to go any lower, but there's uncertainty as to when they'll begin to rise. There is agreement, however, that the climb will be gradual at least through this year. All of the bankers surveyed express concern over the recent "Problem List" disclosures, but no unmanageable problems from customers are reported. In general, area bankers feel that the proposed increase in local taxes in Philadelphia will have no noticeable impact on the current recovery. Any effects on the regional economy, they feel, will be longer-term.