Beige Book Report: Philadelphia
June 16, 1976
Economic conditions in the Third District are improving but at an uneven pace. Retail activity has softened, while the manufacturing sector continues to expand. Increases are reported in new orders, shipments, and employment, while inventories in manufacturing are lower. The longer-term outlook both in retailing and manufacturing remains optimistic. Bankers report that consumer loans are inching up but see no signs yet of any pickup in business borrowing. Businessmen indicate that prices continue to rise, but inflationary pressures are about the same as last month. Major manufacturers in the District report no current bottlenecks in production and expect no significant problems within the next 12 months.
District manufacturers, responding to the latest business outlook survey, report a higher level of economic activity than last month. Close to one-half of the businessmen surveyed see an improvement in general business conditions. Specifically, 38 percent of the respondents indicate gains in new orders and 36 percent note increases in shipments. This is similar to the proportions reporting increases last month but below the gains reported in March and April. Employment in manufacturing shows additional improvement this month. The factory workweek is longer for the fourth month in a row, and work forces are rising at 17 percent of the businesses surveyed. The proportion of firms indicating fewer jobs dropped from 16 percent in March to only 2 percent in the latest survey. At the same time, inventory levels declined this month for the first time since January. The outlook in manufacturing for the next six months is for further expansion. Of the executives polled, 79 percent look for an improved business climate by December. Further gains are expected for employment as well: One-fourth of the respondents project a longer workweek and four out of ten expect to hire additional employees. At the same time, 43 percent of the manufacturers surveyed anticipate increases in inventories. This is down somewhat from last month, when 53 percent were projecting gains six months out. Plans for increases in capital expenditures are off slightly as well. Thirty-four percent of the respondents in the current survey plan to hike their spending for plant and equipment, compared to 46 percent last month.
On the price front, manufacturers report paying and receiving higher prices, but there is little change in the distribution of responses from last month. Forty-nine percent of those surveyed report paying more for their inputs, and 17 percent are charging more for their finished products. By December, 87 percent expect to be paying more for supplies and 72 percent anticipate higher prices for the products they sell. In the retail sector, prices are currently reported to be increasing "moderately."
Area retailers report a slowdown in sales but continue to be optimistic for the rest of this year. Merchants are unanimous in labeling retail activity as "disappointing" in the latest sales period. Reported sales volumes range from 2 percent above to 4 percent below the same period last year. Most of the retailers note that the whole spectrum of wearing apparel was especially weak. One merchant notes additional weakness in draperies, housewares, and major appliances. Several reasons are offered for this softening in sales: a stretch of unseasonably cold weather, the necessity for consumers to begin paying for installment purchases made in the first quarter, and the absence of a boost to spendable income like that provided by the tax rebate last year. Despite current sales performance, retailers continue to be optimistic for the remainder of 1976. However, as one executive put it, "If the next sales period turns out to be as disappointing as the current one, we'll have to adjust our sights for the fall."
Bankers in the District report that loan volume continues to be soft. Consumer loans are moving up slightly, while business loans are characterized as "flat." Bankers are unanimous in citing high levels of corporate liquidity and a very cautious approach to building inventories as reasons for soft business loan demand. There is general agreement that loan volume will be higher by year-end, but bankers are uncertain about the timing and degree of the pickup. The consensus is for a mild increase in the third quarter and for "somewhat more strength" in the final quarter of the year.
Interest rates are expected to move upward gradually. The majority of bankers contacted anticipate a prime rate of 8 percent by the end of this year, with one seeing the possibility of 8 1/2 percent. None of the financial executives contacted feel that the anticipated rise in interest rates through the first quarter of 1977 will hamper economic expansion. However, several are concerned that the recovery in housing may be slowed if long-term rates continue to move up.
The question of capacity utilization and bottlenecks in production was explored with executives in the food, apparel, chemical, petroleum, steel, nonelectrical machinery, and electrical machinery industries. Estimates of present capacity utilization by these businessmen range from 55 percent at one steel company to 95 percent at a firm in the apparel industry. However, not many of the firms contacted report current rates close to these extremes. Most of the reported current operating rates lie within the 70-85-percent range. In general, capacity utilization is now about 20 percentage points above levels recorded in the first and second quarters of 1975.
Manufacturers report that they are presently experiencing no constraints on production. There are no reported problems with raw materials, labor, or fuel requirements. There are scattered reports of large price increases for some raw materials, but these are not considered to be hampering production. For example, one clothing manufacturer notes that piece cloth prices are now 160 percent above two years ago, but he adds that this is causing him no problems. In addition, a producer of nonelectrical machinery reports that cotton imported from the Far East costs twice as much today as it did a year ago. However, he is still ordering with relatively short lead times for delivery. In 1973 and 1974, this businessman was ordering cotton from the Far East a year ahead of the desired delivery time, whereas now he is ordering only three months out. At the same time, some manufacturers report an improvement in their supply picture. A producer of canned foods indicates that it is easier to obtain tinplate now than it was in 1974, and a chemical manufacturer notes an improvement in natural gas supplies. According to this executive, "We were under the threat of a natural gas shortage in the fall of 1975, but we've been informed that supplies will be adequate at least through this winter."
For the longer term, most of the manufacturers contacted feel that they can meet anticipated increases in demand. The clothing manufacturer, whose firm is running at 95 percent of capacity, has recently enlarged an existing plant by 50 percent and, along with subcontracting, expects to be able to meet customers' needs through the fall. All of the manufacturers contacted project higher operating rates by year-end, but there are no concrete expectations of plant and equipment constraints within the next 9-12 months. There is more uncertainty about the second half of 1977, however, and some executives see the "possibility" of running into capacity constraints by late 1977. Nevertheless, those who see such a threat are not expecting a return to the severe conditions of 1974.