Beige Book Report: Philadelphia
December 14, 1977
Reports from the Third District indicate that economic activity is expanding at an uneven pace. Industrial activity is unchanged from November according to the Business Outlook Survey, but retail sales are up for the third month in a row. For the future, manufacturers and retailers are both optimistic. Merchants expect to see positive real gains in sales over the next six months, and manufacturers foresee higher employment and increased spending on plant and equipment. Area bankers say that business borrowing is stronger this month, but still less than hoped for. They anticipate at least one round of interest rate hikes between now and June.
Manufacturers responding to the December Business Outlook Survey report that general business conditions are unchanged from last month, so that the slowdown reported in November appears to be continuing. New orders are also unchanged from last month, and shipments are only marginally higher. Inventories are down slightly for the second consecutive month. Consequently, employment reports are no brighter in December, and the average workweek in the industrial sector is up only fractionally. Most of the current sluggishness appears to be concentrated in the nondurable goods industries.
Comments by a director of this Bank are in line with these reports. He says that business is no better than in November at his firm, which manufactures nondurables. He notes, though, that business always tends to level off at the end of the year. With respect to the future, he expects only moderate improvement in 1978.
The slow pace of activity in the current period has not, however, put a damper on manufacturers' optimism. Over half of the respondents to the current survey say they expect business conditions to get better in the first half of 1978. A like proportion projects higher levels of new orders and shipments by June, and inventories are expected to rise fractionally by that time. Hiring and spending plans reflect this bullish attitude. About one-third of those responding anticipate adding to their work forces over the next two quarters, and 10 percent foresee a lengthening of the workweek. Capital spending increases are forecast at slightly more than one-third of the sampled firms—up from last month.
Price increases in the industrial sector are still less widespread than they were earlier this year. About 25 percent of the executives surveyed report paying more for raw materials this month, while less than 10 percent say they are getting higher prices for their finished products. For the longer term, over four-fifths expect to be paying more for inputs by June, and about three-fifths foresee higher prices for the goods they sell.
Area department store sales are higher this month according to retailers contacted. Reports of current dollar sales range from 10 to 16 percent above December '76 levels, and are generally above anticipated levels as well. Both downtown and suburban stores are doing well this month. Retailers attribute the fast pace in early December to bad weather last month, which kept a lid on sales, and better overall economic conditions from the consumer's point of view. Inventories have been built up through the fourth quarter, but most of the accumulation was voluntary, and executives think that the higher level of stock is consistent with stronger sales. They expect inventories to return to lower levels in the first part of next year.
Over the next two quarters, merchants anticipate sales to be 7 to 10 percent above year-earlier levels. Part of this projected increase, though, (about 2 percent) reflects low sales last spring, owing to a public transit strike in the area. Merchants contacted say they have not adjusted their plans to take lower inflation into consideration, despite the recent slowing in money stock growth. Nor do they expect the imminent increase of two-tenths of a percentage point in the Pennsylvania personal income tax to affect their sales significantly.
Commercial bankers in the region report that the demand for business loans is stronger. Current volume is reported to be at or above last year's levels, but most contacts say it is still below plan. Bankers say that with higher short-term interest rates, many borrowers are turning to the commercial paper and bond markets, instead of borrowing from banks. In an effort to increase business loan volume, some banks have been making special marketing efforts, such as offering fixed rate loans, and increasing offshore loans. Consumer borrowing remains strong and well ahead of year-ago levels.
For the longer term, most bankers contacted foresee some pickup in the demand for C&I loans, with June 1978 levels 8 to 10 percent above mid-1977 figures. Their general feeling is that uncertainty in the business community about tax changes, energy plans, and the dollar's position on foreign exchange markets is blocking further expansion of loans.
The prime rate at all of the banks contacted is steady at 7 3/4 percent. Most bankers forecast "moderate" increases in the prime of 50 to 100 basis points over the next six months. Although one contact says some disintermediation has occurred because of higher short-term rates, most say that any current deposit outflows are a seasonal occurrence.