Beige Book Report: Philadelphia
December 15, 1976
Economic activity in the Third District is faltering in some important sectors. Retail sales are expanding, but conditions in manufacturing have softened. This weakness is primarily in the durable goods sector. While inventory levels in area factories are higher, other major indicators of activity are lower. New orders, unfilled orders, and shipments are each down slightly from November, and employment has dropped for the third month in a row. Nevertheless, the six-month outlook both in retailing and manufacturing is for some strengthening. Capital spending plans show no signs of softening despite the current slowdown. Price pressures on manufacturers are about the same as last month, and prices received are only marginally higher. Bankers report that business loan demand is still weak, and they anticipate only a moderate pickup in 1977.
Manufacturers responding to the current Business Outlook Survey report that overall business conditions are not as good as they were last month. Only 12 percent of the businessmen polled report any improvement this month while 24 percent report a worsening of business conditions. New orders and shipments are down fractionally, employment has fallen, and the factory workweek is shorter. This is the third month in a row in which work forces have been reduced to some degree, and the second month in a row for a shorter workweek. Inventories are slightly higher after being flat since August.
The weakness in new orders, shipments, and employment, as well as the increase in inventories is concentrated in the durable goods industries. To some extent, the buildup in stocks results from slow sales, but this is not the case across the board. A producer of agricultural machinery indicates that much of the increase in his inventory is seasonal, and a manufacturer of specialty steel products notes that he has increased his inventory of nickel and chrome to take advantage of price protection clauses. His firm supplies steel to capital goods industries, and he is looking for a pickup in orders by June.
>Despite the current weakness, manufacturers are looking for improvement over the next two quarters. By June, better business conditions are foreseen by two-thirds of those surveyed—about the same as last month. New orders, shipments and inventories are expected to increase over the period, and higher levels of employment are projected as well. However, the proportion of firms planning to hire additional employees six months out is down to 24 percent from 40 percent in November.
Over the next half-year, capital expenditures are expected to increase at 42 percent of the firms sampled—a figure that has held steady for the better part of this year. In general, producers of durable goods are less bullish than those of nondurables. A manufacturer of commercial air conditioning systems reports that his firm is currently spending only for capital replacement, and he foresees no increase in such expenditures six months from now. That firm is currently producing at 70 percent of capacity, and he notes that capital spending over and above replacement would not occur until utilization reached 80 percent. This would require a 15 percent increase in real demand in 1977, but his projection is for no increase in real terms next year.
Retailers in the area report that while competition is unusually intense, sales are performing just about as expected. Most indicate that November turned out to be a strong month, but few are expecting nominal sales this month to show any sizable gain over the relatively high levels of December 1975. For the fourth quarter, expected gains over last year range from 0 to 8 percent in real terms with most of those contacted looking for 0 to 5 percent. Merchants note, however, that while performance is strong thus far, they are less than certain about their anticipations for the rest of December. While a few are bullish, several are "cautiously optimistic." There is no excessive buildup of inventories reported despite the lull in retail sales earlier in the year. For the longer term, most retailers anticipate moderate real gains in sales in 1977, but this outlook is accompanied by an attitude of caution. As one merchant puts it, "We're not yet ready to commit ourselves to large advertising expenditures or orders for merchandise."
Inflationary pressures in manufacturing appear to be the same as in November. Prices for supplies are moving upward and those for finished products are only marginally higher. About a third of the manufacturers surveyed report paying more for supplies and less than one-fifth indicate higher prices for their own products—both the same as last month. By June, 9 out of 10 expect to be paying more for their inputs, and 2 out of 3 anticipate higher prices for the products they sell.
Bankers in the area report that consumer loan volume continues to increase, but business borrowing is virtually flat. One banker notes an increased number of encouraging conversations with corporate borrowers regarding additions to plant and equipment. This executive feels that these inquiries may be the beginning of a more confident attitude on the part of business borrowers. However, all of the other bankers contacted say that any increase they see in such conversations is below the normal seasonal upswing. With the continued softness in business loan demand, bankers report that lending competition is intensifying.
Looking to 1977, bankers expect consumer loan volume to continue to increase, and they anticipate the beginning of a modest pickup in business loan demand, although not before the second quarter. Local bank projections of business loan volume (current dollars) by year-end '77 range from 6 to 15 percent over year-end '76 levels. At the same time, a moderate increase in interest rates in '77 is anticipated, with the prime projected to be 7-7 1/2 percent by the end of the year. Before the upward movement begins, however, most bankers anticipate a further drop in the prime to 6 percent, and, according to one executive, possibly lower.