Beige Book Report: Philadelphia
April 12, 1977
Economic activity in the Third District is expanding. Retail sales are reported to be good except in areas affected by the Philadelphia transit strike. The manufacturing sector is on a clear upward trend with expansion reported for the fourth month in a row. New orders, shipments, and inventories are higher this month, and employment is improving as well. Manufacturers foresee additional expansion over the next two quarters. Price increases for finished products in this sector are more widespread this month, but projections of increases six months out are less widespread than in March. Sales of existing housing are brisk, while new construction is limited. Commercial bankers report that business loan volume is flat but see signs of increased interest by potential borrowers.
Manufacturers responding to the latest Business Outlook Survey report additional improvement this month. More than half of those polled say that business conditions are better than in March. This is the highest proportion indicating expansion in a year, and the fourth consecutive month in which gains have been reported. New orders and shipments are higher in April, and inventories, which declined in February and held steady in March, are up as well. This expansion in industrial activity is giving a boost to employment. Factory work forces are increasing at one-fourth the firms sampled, and a similar proportion reports a longer workweek. This is the second month in a row in which both employment and the workweek have expanded.
For the longer term, manufacturers look for additional growth. Three out of four expect better business conditions by October. New orders and shipments are expected to increase from their present levels, and inventories are projected to climb as well. At the same time, additional growth in factory employment is anticipated. For the third month in a row, one-half the executives surveyed plan to add to their work forces six months out. In addition, close to one-third plan to lengthen the average workweek. This is down somewhat from last month, but still well above the proportions reported in 1976. Capital spending increases are planned at 40 percent of the firms sampled--about the same as last month.
Prices in manufacturing continue to increase. Fifty-six percent of the respondents report higher prices for supplies this month. This is about the same as in March. On the output side, 40 percent of the businessmen surveyed report higher prices compared to 31 percent last month. By October, 84 percent look for higher prices for supplies and 64 percent expect to be receiving more for their finished products. Last month, these proportions were 86 percent and 74 percent respectively.
Except for a public transit strike in the immediate Philadelphia area, department store sales in the region are showing gains over last year. Sales in areas served by the affected public transit are down considerably, and merchants say the strike is an important factor in this drop. The average guess by retailers contacted is that the strike, which began on March 25, is reducing sales by one- third. Outside of the affected area, sales are up over the same period last year with reported increases ranging from 6 to 11 percent.
Retailers say they may be experiencing a slight drop in sales as a consequence of the upcoming shutdown of a major competitor. Lit Brothers, one of the four major Philadelphia department stores, has announced its intention to close within a few weeks. The chain has 10 branch stores in addition to its downtown location, and employs 2,800 people. Since the last week in March it has been offering hefty discounts on most of its merchandise.
In general, retailers say that soft goods are selling well, especially spring and summer apparel. At the same time, inventories are reported to be in "good balance," although some say that their stocks could become excessive if the transit strike should last through Easter.
The market for existing housing is reported to be very active, but construction of new units is limited. At one large MSB mortgage lending is at its highest ever, and most of this is for existing housing. Mortgage rates have firmed within the past two weeks after being under downward pressure earlier in the year. The current rate on conventional mortgages with financing between 65-80 percent of purchase price is 8 3/4 percent.
Demand for NINOW accounts, which MSBs in Pennsylvania could offer as of March 12, is said to be "slow but steady." Overall deposit inflows are reported to be reasonably good, although they have moderated recently. One MSB official looks for inflows to be fairly good, at least until the third quarter when there are heavy CD maturities. According to this executive, "I don't expect market rates to move up enough to cause any problems by then, but if they do, thrifts are going to lose deposits and people in the housing industry will start screaming."
Bankers in the area report that business loan demand remains basically flat, but a few indicate that they do see some encouraging signs. One notes that, "We're seeing customers who haven't been in to see us for some time." Two other bankers say they're receiving an increasing number of inquiries about fixed-rate loans. One reports that such requests are being handled "gingerly," while another says that his bank has made commitments for fixed-rate loans of $50 million. These are to high-quality customers, and typically have no balance requirement. Rates are in the 8 percent range and the outside maturity is five years.
For the longer term, bankers look for no more than a gradual pickup in business loan demand over the next few quarters. Interest rates are expected to rise gradually as well with a prime in the neighborhood of 7 percent by year-end. Liquidity is reported to be ample for expected credit demands and several banks have lowered rates or extended maturities on their CDs. Bankers say they are concerned about NINOWS, but add that it's too early to get a good idea of their competitive impact.