Beige Book Report: Philadelphia
April 12, 1978
Reports from the Third District indicate that economic activity is generally expanding. Retail sales are up substantially over year-ago levels according to area merchants, and local manufacturers say business is on the upswing. Although retailers expect the pace to slow somewhat, both groups look for expansion to continue over the next six months. The now-settled bituminous coal strike had little effect on the Third District economy. Less than one-quarter of the firms responding to a special survey reported power cutbacks which forced them to reduce output. Despite these optimistic reports, commercial bankers say business loan demand is soft. Although loan volume is above April 1977 levels, it is lower than anticipated for this period. For the longer term, bankers are generally bearish.
District industrial activity is on the rebound according to the April Business Outlook Survey. Thirty-eight percent of this month's respondents note an improvement in general business conditions, while only 6 percent say the pace of business has slowed. This "margin of improvement" of 32 percentage points is the highest in almost a year. Looking to their own firms, responding manufacturers indicate upticks in new orders and shipments, while inventories remain stable. At the same time, the employment picture is reported to be a little brighter in April, with both a small increase in the size of factory payrolls and a slight lengthening of the average workweek reported.
Looking ahead six months, about half of the responding manufacturers anticipate continued expansion, along with higher levels of new orders and shipments. Inventories are expected to increase somewhat between now and October. Despite this relatively optimistic outlook though, executives polled have reservations about employment and capital spending over the next six months.
Only a slight increase in the number of factory employees is forecast, and the length of the average workweek is expected to remain unchanged. Concurrently, less than one-third of those polled report plans to hike plant and equipment expenditures over the next two quarters--down from the levels of the last few months.
Price increases in the industrial sector are no more widespread than they were last month. Half of the respondents to the April survey say they are paying higher prices for inputs, while slightly less than one-third report increases in the price of their finished products. A Director of this Bank in the manufacturing sector says his firm is feeling cost pressures primarily from the energy industry and labor, and that such rising production costs are starting to put a pinch on profits.
The coal strike had little effect on the Third District economy, according to manufacturers responding to a special survey made in the latter part of March and early April. Only 1 out of 5 of those surveyed said they'd had to reduce output as a result of power cuts stemming from the coal strike. Moreover, production cuts that were necessary were minor, generally less than 10 percent. What little impact there was though did find its way into employment numbers, as many of the manufacturers forced to cut output trimmed payrolls as well as hours. Although the output loss was small, prospects for catching up are not good, with over 60 percent of the executives who cut production saying they expected to make up none of the lost product.
Current dollar retail sales are reported to be between 10 and 15 percent ahead of last year, according to area merchants contacted this month, with downtown Philadelphia stores doing better than their suburban branches overall. These figures may be exaggerating actual conditions though. At this time last year, the large price cuts of a major competitor going out of business cut into the sales of other area retailers. A public transit strike last April also helped to keep the lid on sales. Nevertheless, business is said to be slightly better than planned. Retailers attribute the pickup to several factors, including an early Easter and better weather conditions.
For the longer term, area merchants see slower growth over the next six months, with current dollar sales projected to be between 5 and 8 percent ahead of year-earlier figures.
Area bankers report the volume of C&I loans in April to be higher than it was for the corresponding period last year by 3 to 4 percent. This is generally below planned volume. Some banks in the region are making fixed rate loans and lending at "lower than usual" rates in an effort to keep loan volume up. The primary problem, according to contacts, is widespread uncertainty among entrepreneurs about future business conditions, and particularly about the future course of inflation. Businessmen appear to be unwilling to commit themselves to investment projects in the face of such economic uncertainty.
Bankers are not optimistic about future business borrowing. Although one banker looks for loan volume six months down the road to be about 7 percent over year-earlier levels, most look for little or no improvement in 1978.
Short-term interest rates remain steady in April, with the prime at all of the banks contacted at 8 percent. Interest rate projections for the next six months are widely varied, with forecasts for the October prime rate ranging from 8 1/4 to 9 percent.