Beige Book Report: Philadelphia
June 14, 1978
Indications from the Third District are that the local economy continues to expand. Manufacturers report a fourth consecutive month of improvement in the industrial sector, and department store sales have surged ahead so far in June. Retail inventories are at desired levels, with no shortages reported. For the longer term, manufacturers continue to look for gains over the next six months, although such expectations are now less widespread than at any time since January 1975. Retailers foresee continued increases in sales volume throughout the second half of the year. Area bankers report some growth in business borrowing, but say that the underlying "hard" demand for conventional domestic business loans has changed little. The new six-month variable-rate CDs are being met with little enthusiasm by the public. Bankers differ in their views concerning the effect of certificates.
Manufacturers responding to the June Business Outlook Survey indicate continued economic expansion in the industrial sector. This is the fourth consecutive month in which substantial gains have been reported. Respondents indicate higher levels of new orders and shipments, while inventories are down for the second month in a row. At the same time, continuing improvement is noted on the employment front. In the current Survey, 29 percent of the respondents report larger work forces at their factories—the highest this proportion has been in a year—while 17 percent report a longer workweek. Manufacturers report that they are experiencing no tightness in the labor market at this time and no difficulties in obtaining supplies or equipment.
Despite the current strength, however, Third District manufacturers continue to become less bullish. While 46 percent of the respondents to the June Survey look for business conditions to improve in the second half of 1978, 23 percent expect conditions to deteriorate. This "margin of improvement" of 23 percentage points is at its lowest level since January 1975. And, while Survey participants still foresee gains in new orders and shipments, the "margins" in these categories are also at their lowest in the current economic recovery. A Director of this Bank, whose business is in manufacturing, reports that much of the strength he sees in the second quarter is a result of inventory rebuilding. He foresees a slowing in demand as inventories reach desired levels. Nevertheless, local businessmen still project increases in both the size of their payrolls and capital expenditures over the next six months. About one-fourth of the executives polled say they expect to expand their work forces by December, while one-fifth plan to be spending more on plant and equipment by that time.
Price increases in the industrial sector appear to be slightly less prevalent this month. Of those surveyed, 40 percent say they're paying higher prices for raw materials than they did in May, and 30 percent say they're charging more for the goods they sell. For the longer term, 86 percent expect to be paying more for inputs by year- end, while 60 percent plan to hike the prices of their finished products by that time.
Area retailers say business is off to a good start in June, with reports of current dollar sales ranging from 6 to 16 percent ahead of year-ago levels. Sales volume is generally at or slightly above anticipated levels for this period. Merchants expect sales to continue to grow through December with projections of year-end sales 5 to 12 percent ahead of December '77 levels.
Retail inventories are unanimously declared to be in "good shape," having thinned a little after the unplanned accumulation in the first quarter. Merchants contacted say there is no evidence of chronic or acute shortages in any lines. Retailers expect to maintain current inventory levels throughout the rest of this year, and foresee no change in the inventory-sales ratio.
Commercial bankers in the area say business loan demand is up between 4 and 15 percent from a year ago. However, the gains may be the direct result of efforts to increase volume through unconventional methods (such as fixed-rate term loans and off-shore loans), indicating that the demand for conventional business borrowing is essentially flat. But, because initial projections for this time period were not "overly optimistic," volume is just about as planned. Looking ahead to the rest of the year, bankers anticipate gradual improvement in the demand for conventional C&I loans.
The prime rate at all the banks contacted was recently boosted to 8 1/2 percent with further hikes projected by year-end. All bankers contacted expect the prime to top out at 9 percent in 1978, but differ in their projections of when it will peak. (One contact sees the peak as early as September 30th, with a slight decline in the fourth quarter.) Rising short-term interest rates have resulted in little or no disintermediation at commercial banks up to this point, although S&Ls have experienced a significant slowing in deposit growth.
The new six-month variable-rate certificates of deposit are currently carrying an interest rate of 7.1 percent. Yield differentials do exist in the area, however, as some banks are compounding interest daily and others are not. Advertising has been light, in some cases nonexistent, and response to the new instrument has been less than overwhelming. One bank with total deposits of more than $600 million has sold only 3 CDs totaling $70,000, $50,000 of which was rolled over from a maturing certificate at the same bank. Although most bankers did not have such accurate figures this early, the general feeling is that a large portion of the new certificates will be transfers from other instruments within the same institution. Bankers differ in their views on what the effect of the certificates will be. Responses cover the entire spectrum, running from "a big impact—should sustain the housing market" to "no impact on deposit flows at all."