Beige Book Report: Philadelphia
April 14, 1976
Business conditions in the Third District have improved for the second month in a row. Retailers continue to experience strong sales, manufacturers report higher levels of new orders and shipments, and the factory workweek has lengthened. However, job gains in manufacturing have been slight and inventories are unchanged from last month. The outlook for the longer term in manufacturing is for additional expansion and more robust hiring. The market for existing housing is reported to be very active, although only limited recovery is taking place in new construction. Bankers report that loan demand is still weak. On the price front, reports of higher costs are more widespread than last month.
District manufacturers, responding to the latest business outlook survey, report that the level of economic activity is substantially higher this month. Almost 60 percent of the businessmen surveyed report an improvement in general business conditions. This is the second month in a row that one-half or more of the respondents have indicated gains. Half the manufacturers also report specific gains for new orders and shipments. At the same time, inventories, which increased in March, show little change from last month's levels. Stocks are up in the fabricated metals industry but down in chemicals. Despite expanded output in manufacturing (which holds equally for durables and nondurables), job gains have been small during the past month. The average workweek, however, has lengthened somewhat.
The outlook in manufacturing for the next 6 months is for additional expansion. Of the executives polled, 8 out of 10 expect a higher level of economic activity by October. Almost three-fourths anticipate an increase in either new orders or shipments. At the same time, close to half the respondents plan to add to their inventories over the period. Job openings are expected to pick up: half the respondents plan to hire additional employees, and 3 out of 10 anticipate a longer average workweek. An increase in spending for plant and equipment is projected by 40 percent of those polled, about unchanged from last month.
On the price front, 46 percent of the manufacturers polled indicate they are paying higher prices for their supplies. This is up from last month, when 35 percent were reporting increases. At the same time, 20 percent report higher prices for their finished products—about the same as in March. Higher prices are expected to accompany the expansion over the next two quarters. Four-fifths of the respondents expect to be paying more for their supplies, and three-fifths anticipate charging more for their finished products.
Retail executives paint a bright sales picture, with current volume above their expectations. One merchant, who was looking for sales to be about 10 percent above year-ago levels, notes that the gain is closer to 14 percent, All of the executives contacted report that most lines of merchandise are selling well. Men's fashions are singled out as exceptionally strong, and one retailer notes a resurgence in big-ticket items such as refrigerators and other appliances for the home. The outlook for the next few months is "very bullish," but there is general agreement that the major sales momentum for 1976 will occur in the first half of the year. Calendar factors and an expected pickup in inflation later in the year are cited as the reasons for this assessment. No significant movement in prices is reported, and one retailer notes that his prices "are not much higher than a year ago due to a conscious effort to be competitive." He adds that, by the end of 1976, prices charged in his stores will be about 5 percent above year-end 1975. Inventories are said to be in "fine shape," and no problems with deliveries are reported. Retailers note that they are receiving 90-95 percent of their deliveries on time. Area merchants indicate that they encountered no problems as a result of the recent Teamster's strike.
The residential housing market in the area is reported to be brisk for existing housing, but only limited recovery is taking place in new construction. Work reportedly is beginning again on unfinished multifamily housing in the region, but little new construction is anticipated in the near future. One MSB official notes that savings inflows have been very strong and that mortgage rates have declined. He quotes the best rate at his institution currently as 8 3/4 percent, with the top of the range at 9 1/4 percent. This executive sees the possibility of further declines in rates before they begin moving up gradually around midyear. He adds, however, that the rise in rates through the end of 1976 will have little dampening effect on the housing market.
Area bankers report that loan volume remains flat. All of the executives contacted indicate that consumer loans are inching up, but they don't consider this movement significant. It's agreed that business loans are weak, and more frequent contacts with customers to try to generate more use of existing lines of credit are reported. Bankers are mixed in their forecasts of a pickup in loan demand. One contact notes that, with inventory accumulation taking place, loan volume should begin to move up by midyear. Another projects an expansion in loans by the fourth quarter. This official feels that, if businesses want to share in the recovery, they can't continue to reduce receivables and inventories much longer. All of the bankers contacted feel that short-term interest rates are at their floor; but there's uncertainty as to when rates will begin to move up, since earlier expectations were for rates to be increasing by this time.