August 10, 1977
Economic activity in the Third District is expanding at a slightly quicker pace than in July. Department store sales have picked up somewhat, and reports of improvement in the manufacturing sector are more widespread than they were last month. New orders and shipments are up in August, and inventories are stable. Employment and the workweek in the industrial sector are unchanged. For the longer term, however, both retailers and manufacturers are less optimistic. Most retailers anticipate a continuation of their recent trend of sluggish sales growth. In addition, plans for increases in capital spending are reported by a smaller proportion of sampled manufacturers than at any time in the past two years. Bankers indicate that the consumer loan market remains active, but that business loan demand is still weak. Interest rates are holding steady, but a gradual rise is expected.
Directors of this Bank and manufacturing executives in the District had mixed reactions to questions about current business conditions. Manufacturers responding to the latest Business Outlook Survey report that conditions are better than in July. Thirty percent of the executives surveyed say that business has improved this month while 6 percent say it has worsened. This "net improvement" of 24 percentage points is up from last month but still well below levels set during the preceding three months. New orders and shipments, which were both unchanged last month, are higher in August, and manufacturers' inventories are stable for the fourth consecutive month. At the same time, employment and the average workweek in the manufacturing sector are unchanged. Factory employment showed only slight improvement last month. Directors' comments suggest wide variation in economic conditions among industries. One Director, whose company manufactures chemicals, reports that business is slow and is not expected to improve much in coming months. But another, whose firm depends heavily on the auto industry, says business is better than hoped for, and has planned to increase capital spending over the next five months.
For the longer term, manufacturers are less optimistic than they have been in recent months. About half of the survey respondents expect business to improve by February—down from 73 percent indicating such expectations last month, and 67 percent in June. Increases in new orders, shipments and inventories are projected, but at a smaller proportion of the sampled firms than in July. Gains in employment continue to be forecast, but these expectations are also less widespread than in the previous survey. Eighteen percent of those polled anticipated expanding their work forces by February, and 24 percent expect to lengthen working hours. Last month these proportions were 25 and 28 percent respectively. Increases in expenditures on plant and equipment are planned at one quarter of the sampled firms. This is the lowest proportion reporting such plans since September 1975.
Prices in manufacturing continue to increase, climbing at a somewhat faster pace than in July. Over forty percent of those surveyed report paying more for raw materials, while 30 percent say they are receiving higher prices for the products they sell. Almost 9 out of 10 foresee higher prices for inputs by February, and 7 out of 10 anticipate receiving higher prices for their finished products.
The retail sales picture in the area is improving. Department store executives contacted report that current dollar sales range between 6 and 25 percent above August '76 levels. Generally, sales are at or above expected levels. Stores in the downtown Philadelphia area have seen recent improvement in sales, but not of the magnitude experienced by suburban stores. Merchants attribute the pickup in center city business to the recent completion of construction in the central business district, allowing better access to the stores, and to large price reductions by a major competitor trying to reduce stock before moving to a new building. Retailers say that, in general, inventories are slightly higher than year-ago levels, but satisfactory. Most see a mild buildup of inventories over the next six months.
Merchants generally look for only a modest rise in sales during the remainder of the year. While one expects year-end sales to be about 14 percent above December '76 levels, most foresee gains in the 4-8 percent range. The merchants contacted do not appear to be concerned over the current economic slowdown. The general consensus is that it is a pause in the expansion, and does not warrant changes in buying plans over the next six months.
Bankers in the region report that while consumer loan demand remains strong, demand for business loans continues to be weak. Those contacted say that current levels of C&I loans are between 2 percent above and 2 percent below year-ago levels. While local business borrowing is as anticipated or better, the national market continues to lag behind expectations. The prime rate has been held at 6 3/4 percent at all of the banks contacted.
Bankers appear to be mildly concerned about deposit outflows as their "wild cards" mature. Some have recently raised CD rates in an effort to retain their share of "wild card" holders. One banker, whose bank was already paying the legal maximum on CDs, notes that "about one-third of the wild cards have been rolled over into other types of time deposits at this bank. The other two-thirds have been lost."
For the rest of the year, bankers expect little change in business loan demand. Virtually all of those contacted anticipate year-end volume to be no higher than at the end of 1976. Interest rates are expected to move up gradually with a prime by the end of this year in the 7-7 1/4 percent range.