Beige Book Report: Philadelphia
May 12, 1976
Economic activity in the Third District continues to expand. The retail sector shows healthy gains in sales, and manufacturers report increases in new orders and shipments although the increases are less widespread than last month. At the same time, employment and the average workweek in manufacturing show moderate gains while inventories in this sector are unchanged. The longer-term outlook in manufacturing is for additional expansion. Bankers indicate that consumer loans are increasing but business loans are sagging. Businessmen continue to report rising prices, and inflationary pressures are essentially the same as last month.
Manufacturers responding to this month's business outlook survey report additional improvement in business over last month. Of the businessmen surveyed, one-half report a higher level of general business activity—slightly fewer than last month. Specific gains in new orders and shipments are indicated, although the reported increases are not as widespread as they were in April. One-third of the firms in the current survey report increases in new orders and 4 out of 10 indicate higher levels of shipments. Last month, by comparison, more than half of the respondents reported gains in each of these categories. Manufacturing employment is another "plus" this month. The factory workweek is somewhat longer, and work forces are higher at 17 percent of the businesses surveyed. While this gain in employment appears modest, the job picture is brighter than it has been for quite some time. Only 4 percent of the respondents report employment cutbacks since last month and this "net gain" of 13 percentage points is the highest since October 1973. One major area showing no increase is inventories which are basically unchanged from last month.
The outlook in manufacturing for the next two quarters is optimistic with 8 out of 10 respondents projecting expansion. New orders and shipments are expected to be higher by fall and increases in inventories and employment are also projected. Fifty percent of those polled expect to add to their inventories, 45 percent plan to hire additional workers and 30 percent anticipate lengthening the average workweek. In addition, 4 out of 10 respondents plan to hike their spending for plant and equipment—about the same as in the three previous surveys.
On the price front, manufacturers report paying and receiving higher prices this month, but there is no significant change in the distribution of responses from last month. Forty-seven percent of the respondents report paying more for their supplies currently and 19 percent have raised the price tags for their finished products. The outlook is for additional price increases in the next six months. Eighty percent of those surveyed expect to be paying more for their inputs over the period and 70 percent anticipate charging more for the products they sell.
Retail executives continue to report strong sales and the outlook for the rest of this year is optimistic. The majority of retailers report that current sales are more than 10 percent above year-ago levels; this is several percentage points higher than their forecasts for this period. Reports are mixed, however, on the components of total sales volume. One retailer notes that, "apparel carried the day" in the most recent sales period while another labels apparel sales as "slightly disappointing." A carpet manufacturer in the District indicates a noticeable softening in orders from retailers since late February, and merchants in the area confirm this slump although one mentions a slight pickup recently. Area retailers are optimistic about sales prospects over the next several months. One executive looks for a big lift in the summer from bicentennial tourists. Her store has already run several bicentennial-related promotions which boosted floor traffic, and many additional promotions of this type are planned through the summer. There is general agreement among retailers that price increases are "modest" and no recent attempt by suppliers to push through large price hikes is reported.
Area bankers report that total loan volume continues to be soft. Consumer loans are up but business loans continue to sag. Consumer credit card loans are reported to be increasing, and one banker notes a strong promotion of auto loans at his bank. Commercial and industrial loans are falling off with one banker noting a $35 million runoff in the last month. All of the bankers surveyed attribute the weakness in business loans to improved business liquidity but most expect pressure on operating funds to intensify. As one banker put it, "I hear more and more talk that increasing demand will require additions to inventories and this will increase the demand for short-term financing." The consensus among bankers is that loan demand will pick up sometime in the third quarter of this year.
At the same time, short-term interest rates are expected to climb gradually from this point on. There are no reported plans to lower the prime rate. One executive feels it would generate little additional loan volume, but notes that loans at his bank might be made at less-than-prime rates if customers requested such an arrangement. By year-end the prime rate is expected to be in the 7 1/2-8 percent range with Fed funds trading around 6 1/2-7 percent. In general, bankers in the District express satisfaction with the pace of economic recovery. There is little concern at this time about the danger of the economy overheating, and the anticipated rise in interest rates through the end of 1976 is not expected to put a damper on the expansion.