Beige Book Report: Philadelphia
January 11, 1978
Indications from the Third District are that economic activity continues to expand unevenly. Respondents to the January Business Outlook Survey say that manufacturing activity is essentially unchanged for the third straight month, but retail sales are up for the fourth month in a row according to executives in that sector. Looking to the future, both manufacturers and retailers are anticipating expansion. Area bankers say that business borrowing is up, but still generally sluggish. They too look for expansion over the next six months. The nationwide coal strike is having little effect on the District economy at this time, but shortages could develop if miners stay off the job through February.
Manufacturers responding to this month's Business Outlook Survey say that general business conditions are only marginally better than last month, indicating that the slowdown that started in November is now in its third month. In terms of specific indicators, employment and the average workweek are unchanged, continuing a three-month trend. New orders and shipments are higher in January, but inventories are down for the first time since early last year.
The continued sluggishness appears to be having an effect on manufacturers' expectations regarding the next six months. While producers are still bullish overall, fewer are looking for improvement in the first half of 1978 than in previous months. New orders and shipments are expected to pick up, but again by a smaller proportion of respondents than in the recent past. At the same time, inventories are projected to remain at their current levels. Despite this dampened optimism, however, manufacturers still anticipate some gains in employment over the next six months. Thirty percent of the respondents say they plan to add to their payrolls by July, and 21 percent anticipate a longer workweek by that time. Capital spending plans have not been diminished either. Increases in expenditures on plant and equipment are planned at slightly more than one-third of the sampled firms—about the same as last month.
Comments by a director of this Bank are consistent with these reported expectations. He sees the outlook for 1978 as only moderate, and claims that capacity utilization in his particular industry won't approach the levels necessary to induce investment.
Price increases in the industrial sector appear to be picking up steam. Over half of the executives surveyed this month report higher prices for inputs, and about one-fourth say they're getting more for the goods they sell. As for the future, three-fourths of those polled anticipate paying more for raw materials by July, while about half expect to hike the prices of their finished products.
The nationwide coal strike is having little impact on the Third District economy. Although about 18 percent of all bituminous coal miners in the U.S. are employed in Pennsylvania, only about 4 percent work in the Third District. Moreover, utilities and steel producers, the major users of coal, have stockpiled the fuel so that no shortages have as yet developed. According to a director of this Bank representing the energy industry though, with the strike now in its sixth week, about half of those inventories have been depleted. Should the strike last longer than 45 more days, supply may become a problem as holders of inventories try to spread a limited stock over a longer time. Coal officials contacted had no opinion on the expected duration of the work stoppage.
Sales at area department stores are higher again in January according to retailing executives. Current dollar sales, reported to be between 8 and 21 percent above January '77 levels, are outpacing expectations by about 5 percentage points in most cases. Downtown Philadelphia and suburban stores are doing equally well.
Merchants appear to be optimistic about economic conditions over the next six months, and look for sales increases of 5 to 12 percent over year-earlier levels. Consequently, most retailers say that inventories are up, but that these higher levels are consistent with the expected higher sales volume.
Commercial bankers in the area say that business loan demand is about 4 percent higher than it was at this time last year. This is generally at or below planned levels. Bankers note that although borrowing by local businesses is "as expected," the national market continues to be depressed. They continue to cite alternative sources of funds and uncertainty about future economic developments as the major causes of sluggish loan demand. The demand for the consumer loans remains strong.
For the longer term, bankers foresee "moderate" growth in C&I loans. They expect July loan volume to be 7 to 9 percent above the mid-1977 level.
The prime rate at every bank contacted is at 7 3/4 or 8 percent. It is generally expected to increase to about 8 1/4 percent by mid-year. Contacts say they have noticed some disintermediation owing to higher short-term rates, but that it is not now a problem. One banker noted that when interest rates started to rise, some depositors shifted to higher-rate, longer-term certificates and are now locked into those deposits, and claims that this is one factor that has helped to keep disintermediation to a minimum.