May 10, 1977
Economic activity in the Third District continues to expand. A public transit strike kept the lid on retail sales in the Philadelphia area through the first week in May, but good gains are reported in areas not directly affected by the strike. Moreover, the manufacturing sector shows additional expansion although at a somewhat slower pace. New orders and shipments are higher while inventories are unchanged. At the same time, employment in this sector has improved for the third straight month. For the longer term, both retailers and manufacturers look for additional expansion. Planned increases in capital spending six months out are less widespread than in previous months, but this reportedly reflects unusually large outlays in the current period rather than any increase in uncertainty over economic prospects.
Manufacturers responding to the latest Business Outlook Survey say that business is better than last month. Forty-two percent of the respondents report gains in general business activity. This is down from April, however, when 56 percent were reporting improved business conditions. New orders are higher at slightly more than one-third of the firms sampled, and a similar proportion of the respondents indicate higher levels of shipments. In April, by comparison, one-half the surveyed executives indicated gains in these categories. Inventories are unchanged this month after increasing in the previous survey. At the same time, both employment and the average workweek are expanding for the third month in a row.
For the longer term, manufacturers look for additional expansion, although expectations of gains are somewhat less widespread than in April. Two-thirds of the respondents look for better business conditions six months out—down from three-fourths in the previous survey. New orders and shipments are expected to climb over the next two quarters, but inventory levels are projected to be no higher than in the current period. This is the first time that the six-month inventory projection has been for no change since last November. At the same time, employment and working hours are expected to increase although the proportion of firms planning to hire additional workers six months out is down from April.
The President's recent energy proposals have produced no evidence of any weakening in capital spending plans. Thirty-nine percent of the respondents expect their levels of capital expenditures six months from now to be higher than current levels while 7 percent anticipate lower levels. This "net increase" of 32 percentage points is down from 40 points in April and is the lowest since last summer. However, a check with those respondents who report plans for curbing capital outlays indicates that this arises from unusually high expenditures in the current period rather than from any increased uncertainty as a result of the President's energy proposals. In fact, manufacturers contacted say that the proposals are so tentative that they have not given them much consideration thus far. The only concrete impact reported involves a regional auto parts supplier in New Jersey who is expanding his inventory of parts for smaller cars.
Prices in the industrial sector continue to climb, but the increases are no more widespread than in April. In the current survey, 54 percent of the respondents report higher prices for supplies and 32 percent report higher prices for their finished products. By November, 95 percent look for higher prices for inputs and 76 percent anticipate higher prices for the products they sell. Both of these proportions are about 10 percentage points higher than last month.
Department store sales in the region exhibit about the same pattern as last month. While a public transit strike put a damper on sales in Philadelphia's central business district, stores in the outlying areas are experiencing good sales gains. The transit strike, which lasted from March 25 through the first week in May, had a definite impact on sales according to merchants contacted. One estimates that normal sales volume at his downtown store was cut in half as a direct result of the strike. Another retailer feels that people had begun adjusting to the lack of public transit, but he guesses that normal sales near the end of the strike were still reduced by about a third.
Outside of the immediate strike area, sales are reported to be good with gains of up to 10 percent over year-ago levels. Generally these gains are "not quite up to expectations, but close nonetheless". Housewares and T. V.'s are said to be selling well, and a few merchants note that soft goods in general are not keeping pace with their expectations. For the longer term, retailers look for further gains in sales. For the remainder of this year, one merchant with stores outside the immediate Philadelphia area looks for gains in current dollars of more than 10 percent over the same period in 1976. Merchants whose stores are concentrated in the Philadelphia metropolitan area, however, look for gains closer to 5 percent.
Bankers report that business loan volume is flat or down in April. However, all of those contacted say there is some pickup in discussions of financing terms with potential business borrowers. One notes that while the numbers don't show up in the books, commitments are up at his bank and he is "definitely encouraged" by the pickup in interest on the part of local businesses. He feels that businessmen are becoming more encouraged by the longer-term economic prospects and they feel that inflation, while still too high, is "manageable."
For the longer term, bankers look for only moderate increases in business loan volume over the remainder of this year. Interest rates are expected to move upward during this period. Forecasts of 5 3/4-6 percent for Fed funds and 7-7 1/4 percent for the prime seem to be the norm.