Beige Book Report: Philadelphia
February 21, 1978
Reports from the Third District indicate that economic activity is generally slow. Manufacturers say that business is unchanged from January, and inclement weather has put a damper on retail sales. Executives in both of these sectors look for renewed expansion over the next six months. Area bankers say that business loan demand is seasonally slow, and that it too should gain strength in the future. They express a belief, though, that higher short-term interest rates could have repercussions in the mortgage market. The nationwide coal strike also threatens to cut into the District economy if striking miners do not ratify a contract soon.
Manufacturers responding to this month's Business Outlook Survey say that the general business climate is unchanged from January, continuing a now four-month old slowing trend. Supporting the claims of a slowdown in growth, respondents indicate no change in new orders this month, and only a weak increase in shipments. Consequently, there is no improvement reported on the employment front, and inventories are up fractionally.
As for the future, although manufacturers are still generally bullish, the overall optimism continues to diminish as the industrial sector fails to gain real strength. New orders and shipments are projected to pick up over the next six months, but these expectations are also less widespread than they have been recently. Despite the dampened outlook though, manufacturers in the District continue to foresee gains in employment and increases in capital spending. In the current Survey, 40 percent of the respondents say they anticipate adding to their work forces by August, and a like proportion plans to increase plant and equipment expenditures.
Prices increases in the industrial sector are no more widespread in February than last month. About half of those polled this month report paying higher prices for raw materials, while about one fourth say they are charging more for their finished products. Looking ahead six months, over 80 percent expect to be paying more for inputs, while only about 60 percent think they'll be able to get higher prices for the goods they sell.
The nationwide bituminous coal strike could seriously affect the Third District economy if an agreement between striking miners and management is not reached quickly. Although the strike does not have a direct effect on employment, since less than 1 percent of the District labor force is involved in coal mining, the local economy could be impacted if coal shortages develop. Over half of the original stockpiles that the major coal users, mainly utilities, had accumulated before the strike are now gone, and users have begun to substitute more expensive fuels for coal. As stock piles dwindle, power cutbacks could have serious repercussions in the industrial sector and therefore on employment. A Director of this bank representing the energy industry believes that the crucial point has already been passed, and that this area will start to feel real employment effects in a matter of days.
Retail sales in the area are reported to be mixed. Reports of current dollar sales range from 1 percent below to 5 percent above year-ago levels, and sales are generally below planned volume. The major reason for this, according to contacts, has been extremely adverse weather which has helped to keep the lid on sales since the middle of January. In addition, two of the worst winter storms to hit the area in twenty years caused merchants, along with other business people, to shut down and lose a total of three selling days. Inventories are somewhat thicker than they were last year at this time, partly as a result of slow winter sales, and partly as a result of a management decision to add to stocks.
For the longer term, retailers are looking for a "healthy" spring buying season, hence the decision to increase inventories. Moreover, they believe the recent slowdown to be a temporary setback, and expect to recover lost sales over the next two months. Overall, mid- summer sales are projected to be between 6 and 9 percent above year- earlier levels.
Reports from commercial bankers in the region indicate that business loan demand is slow, but no worse than seasonal patterns would lead one to expect. In terms of levels, commercial loans are between 2 and 5 percent ahead of the corresponding period in 1977. Consumer loan demand remains strong. Over the next six months bankers expect a slight pickup in C&I loans with August levels about 4 percent ahead of year-earlier figures.
The prime rate is currently 8 percent at all of the banks contacted, and is generally expected to be pushed into the 8 1/2 to 8 3/4 percent range by late summer.
Bankers contacted say that higher short-term interest rates will definitely have an effect on the market for mortgage funds. Some have already noticed some disintermediation on the part of depositors as higher earning assets became available. One official at a local MSB notes that there is still a net inflow of deposits at his institution only because the rate on large CDs was recently hiked. He believes that if the short-term rate rises another 25 basis points, this region will see a significant shrinkage in the supply of available mortgage funds. In addition to this, most of the commercial bankers contacted say that as short-term rates go up, lenders will shift away from mortgages into short-term assets. It is generally felt that this would also happen at institutions committed to financing the housing market, such as MSBs and S&Ls, but that they would take a longer time, perhaps 4 to 5 months, to make such alterations in their loan portfolios.