Beige Book Report: Philadelphia
January 13, 1977
Economic conditions in the Third District are improving. Retail sales are up over year-ago levels, and manufacturing activity shows a modest uptick, after faltering in December. New orders, shipments, and inventories are higher this month, and the average workweek is longer. At the same time, factory employment has stabilized after declining in the three previous months. Additions to work forces in nondurables are balanced by cutbacks in durables. Over the longer term, both retailers and manufacturers are looking for additional expansion. Higher prices and higher costs in manufacturing are somewhat more widespread than in December. Bankers report that business loan demand remains weak, and no substantial increase is expected before the third quarter. In addition, bankers say they are considering a reduction in rates paid to savers.
Manufacturers responding to this month's Business Outlook Survey report that economic activity is up somewhat from last month. Twenty-four percent of the businessmen surveyed indicate improvement while 16 percent say that business is worse—a reversal of the December survey results when 16 percent reported increases and 23 percent reported declines. New orders and shipments are higher this month after being flat in November and December, and slight increases in inventories are reported for the second month in a row.
The improvement in the manufacturing sector is evident in employment. Work forces are unchanged after declining since October, and the average workweek, which was shortened in each of the past two months, is lengthening in January.
Over the next two quarters, manufacturers look for additional expansion. Three-fourths of the executives surveyed anticipate better business conditions by July. New orders, shipments, and employment are each expected to increase over the period. At the same time, increases in capital expenditures are planned by one-third of the firms sampled—down marginally from last month. Inventories, however, are projected to be at current levels six months from now.
Inflationary pressures in manufacturing are more widespread this month. Higher prices for supplies are reported at 44 percent of the firms surveyed while 16 percent report higher prices for their finished products. Both of these are up somewhat from December. By July, 9 out of 10 businessmen in this region expect to be paying more for their inputs, and 3 out of 4 anticipate higher prices for the products they sell.
Retailers in the area report that sales in December were above last year's levels. Most of the merchants contacted put dollar gains around 4 percent. The last two weeks in the month were reportedly very strong, and most retailers say that the two additional shopping days this year helped boost sales. All of those contacted indicate that this latest sales activity was in line with their expectations, which in some cases had been reduced from projections made earlier in 1976. For 1977, retailers are looking for moderate sales gains over last year, and most anticipate a relatively sluggish first half. Competition is expected to remain intense, and merchant's feel that they will have to be aggressive in order to raise annual sales by more than 5 percent. Inventories will be "watched closely" in '77, and it is expected that the sales outlook over the next two quarters will not be greatly altered by any of the fiscal measures currently under discussion.
Bankers in the region report continued weakness in business loan demand. By the end of this year, the outlook for business loan volume ranges from 4 to 10 percent. Slower growth is projected in the first half of the year and then faster growth in the final two quarters. Most bankers note, however, that they expect loan demand to lag any pickup in the pace of recovery. The forecasts for interest rates call for a prime of 7-7 1/2 percent by the end of the year.
Bankers indicate that a reduction in the rates paid on savings is under consideration. One respondent doubts that such a move will actually occur in the Philadelphia market, and another feels the chances are 50-50. Most of those contacted say they are ready to follow a reduction of rates by one or more competitors, but don't want to initiate it themselves.