Beige Book Report: Philadelphia
October 13, 1976
Business conditions in the Third District are improving, but the pace of improvement is somewhat sluggish. Retail sales are only slightly above the same period last year, and while the manufacturing sector is expanding, job growth is at a standstill. New orders and shipments in manufacturing are higher this month, while inventories along with work forces are unchanged. The longer term outlook in manufacturing remains optimistic, and retailers are hoping for a healthy fourth quarter. Reports of higher prices for finished products in manufacturing are less widespread than in September. Businessmen indicate that their outlook for inflation over the next three quarters has not changed within the last few months. They still expect the current rate to continue through the second quarter of next year. Bankers report that business loan demand remains weak, and they foresee no pickup in the near future. As a result they face growing pressure to ease their lending terms and are gradually lengthening the maturity of their government securities portfolios.
District manufacturers, responding to this month's business outlook survey, report a somewhat higher level of economic activity than last month. New orders and shipments are higher this month, and the factory workweek has been lengthened as well. However, inventories and jobs are unchanged for the second month in a row. While inventories declined on balance during the summer, the sluggishness in employment comes on the heels of monthly job gains in the April-August period.
The outlook in manufacturing for the next six months is for additional expansion. Of the executives polled, 3 out of 5 look for better business conditions over the next two quarters. Increases are projected in new orders and shipments, and the employment picture is expected to brighten as well. A longer factory workweek is anticipated by 20 percent of the respondents and 40 percent plan to hire additional workers-up from last month. At the same time, one-half of the manufacturers surveyed plan to hike their spending for plant and equipment over the period while one-tenth expect capital expenditures to be lower by next April. This "net increase" is about the same as last month. The only major indicator not projected to increase over the longer term is inventories which are expected to be unchanged from present levels.
With respect to prices, 50 percent of the respondents indicate paying higher prices for their supplies-about the same as in September. At the same time, 20 percent report price hikes for their finished products. This is down from last month when 30 percent were reporting increases. By April, 8 out of 10 expect to be paying more for their inputs, and 7 out of 10 anticipate higher prices for the products they sell.
The question of inflationary expectations was explored with several retailers, bankers, and manufacturing executives. All of those surveyed expect the current rate of inflation to continue through the first half of next year. In addition, all but one of those questioned indicate that these expectations are unchanged from a few months ago. One banker has lowered his forecast of the inflation rate for the next three quarters. Seven weeks ago this executive expected prices to be climbing at a somewhat higher rate over the period in question. Now, however, "As a result of the continued pause in the recovery," he looks for the rate of inflation to stay flat through the first half of 1977.
Area retailers report that current dollar sales are running only 1-2 percent above the same period last year. This performance is several percentage points below their expectations. One merchant says that furniture, floor coverings, and major appliances are selling well, while most of those contacted single out men's and women's apparel as being relatively weak. Retailers express mixed views about the rest of this year. The highest forecast is for a fourth quarter gain over last year of 12 percent, but some of this will be the result of an additional branch store which has been in operation for only a few months. Another merchant, as a result of the soft third quarter, is scaling down his projections for the last quarter of the year. He notes that, "I'm still looking for a small improvement over last year, but this is a very 'iffy' guess."
Bankers in the area report that the loan picture is little changed from previous months. While consumer loans are reported to be more or less steady, business loan volume is labeled as "very very sluggish" and "worse than flat." Bankers indicate that the pressure on them from potential borrowers to ease up on loan conditions is continuing. Interest rates, credit line fees, and compensating balances are all reported to be slipping "modestly." This applies especially to balances, which bankers indicate, "are not being watched very closely."
For the longer term, business loan demand is expected to remain weak. One banker sees no pickup in business borrowing until spring at the earliest. At the same time, the pressure to ease conditions on loans is expected to intensify over the next few months. The outlook for interest rates is for continued softness into 1977 with some possibility of a further drop in the prime rate before year-end '76. Bankers report that the maturity structure of their government security holdings is lengthening somewhat, but they expect to be liquid enough to meet increased loan demand when it materializes. One financial executive, however, voices some concern over the longer maturities, noting that, "our expectations have been wrong before."