December 13, 1978
Indications from the Third District are that local economic activity is mixed in December. Manufacturers say business conditions have worsened since last month and have consequently held the line on hiring. Looking ahead to the first half of 1979, executives in the industrial sector see business slipping a little further. In the retail sector, merchants report sluggish sales currently and look for more of the same over the next two quarters. Unplanned inventory accumulation is being experienced in some stores, mostly at the larger, national chains. Area bankers report strong loan demand so far in December, and look for continued growth next year. Bankers are in disagreement about the future course of interest rates.
Manufacturers responding to this month's Business Outlook Survey say business conditions have deteriorated since November. Only 10 percent of the respondents note a pickup in activity at their firms over the last month, while 28 percent report a decline. This yields a "net change" of minus 18 percentage points—the first major decline in business activity at firms in the Survey since March 1975. Supporting the claims of a drop-off in business, respondents report both new orders and shipments to be down in December. Inventories are stable after a dip last month. On the employment front, the size of factory work forces has remained more or less unchanged, while the workweek has been trimmed slightly.
For the longer term, manufacturers are generally bearish about future economic conditions. They look for a further slowing of business activity between now and June, with no change in the level of new orders and only a fractional increase in shipments. Consistent with this outlook for production is the forecast of no growth in the size of factory payrolls over the next two quarters along with further cuts in the length of the workweek.
A Director of this Bank, whose business is in the manufacturing sector, agrees that the outlook for 1979 is "shaky." In fact, his company is budgeting for a recession next year. He sees a downturn as a virtual certainty and says the only questions are when it will come and how deep it will be.
Inflation in the industrial sector continues in December. Over 60 percent of the manufacturers polled this month report higher prices for inputs, while about 30 percent are charging more for their finished products. As for the future, the executives surveyed look for price hikes to become more widespread over the next six months. Eighty-six percent of the respondents expect their costs to go up in the first half of 1979, and about 65 percent plan to raise the prices of the goods they sell in that period.
Sales at area department stores are extremely slow so far in December, but retailers are looking for a big surge to come seven to ten days before Christmas. Reports of current dollar sales range from only 3 percent above to 2 percent below December '77 levels, which means that all merchants contacted have experienced a drop in constant dollar sales. Current sales volume is generally below projected figures for this period, even though those projections were "extremely modest."
Local merchants mention several reasons for sluggish sales this month, including unseasonably warm weather which has not put shoppers in the "holiday buying mood" and the possibility that general uncertainty about the course of the economy over the next few months is causing consumers to hold on to dollars they might otherwise spend. Another reason for the poor sales performance might be that this year's sales are being compared to record levels in December '77, making it difficult to show much improvement. However, a Director of this Bank whose business is retailing sees the current sales slowdown as part of a longer-term trend that started in October. He expects consumers will continue to reduce spending and lead the economy into recession next year.
Despite slower than expected sales, inventories at department stores based in this area are reported to be in good shape. Contacts in the retail sector indicate that this is not the case in the national chains where stocks are beginning to accumulate at an unplanned pace. Merchants at the smaller, local chains say they have been insulated from unplanned inventory accumulation because they have more flexibility in buying their merchandise than do managers in the larger chains, who often make inventory commitments many months in advance.
Looking ahead to the next six months, most retailers contacted foresee little improvement in business, with the exception of the period immediately prior to Christmas. Forecasts of sales between now and June range from "flat" to 4 percent ahead of year-earlier levels. Some plans to cut inventories early in 1979 are reported.
Area bankers say that the demand for both consumer and business loans is generally strong this month. Reports of current C&I loan volume compared to December '77 levels range from "about even" to 8 1/2 percent ahead. This is generally as expected or a little ahead of plan for this period. As for the future, contacts in the banking sector foresee moderate to strong growth in loan demand over the next six months.
Future interest rates are a matter of some speculation and disagreement among local bankers. Expectations concerning the timing of a peak in rates, as well as their actual levels, vary widely. Six month projections of the prime rate, currently 11 1/2 percent at all of the banks contacted, range from a climb to 12 percent by early 1979 and then a plateau through June, to a continued rise over the next two quarters with a prime rate of 13 percent occurring in early summer.
High interest rates continue to cause some disintermediation at area banks, but the problem is apparently not serious. At least part of the outflow of funds from consumer-type time and savings deposits is being offset by new purchases of 6-month money market certificates. The certificates are being aggressively promoted currently. Moreover, a large portion of the certificates first issued in June and now coming due are reportedly being rolled over, thereby supplying the banks with a continuing source of funds.