Beige Book Report: Philadelphia
August 7, 1979
Third District economic activity is mixed this month. Industrial executives report a decline in manufacturing which follows three months of no growth in that sector. Retail sales have improved slightly, however, after the gasoline shortage induced a June lull. Area bankers report moderate loan demand. As for the future, representatives from all three sectors agree that the next six months will bring a substantial decrease in business activity.
Manufacturers responding to this month's Business Outlook Survey report a decline in area industrial activity during the month of July. Thirty percent of the firms polled indicate a decrease in overall business activity, the largest drop recorded in over 4 1/2 years. However, this figure may somewhat overstate the actual decline in as much as July is typically a slow month for local industry.
Turning to specific indicators of current business activity, shipments were reported to be fractionally higher, but new orders remained unchanged and inventories slipped substantially, marking the ninth month in a row of declining inventory levels. As far as local labor is concerned, factory employment grew slightly during the month but this gain was offset by a fractional shortening of the average workweek.
The gasoline shortage experienced in the region during late June does not appear to have contributed significantly to July's slowdown in manufacturing activity. Responses to a special gasoline-effects inquiry indicate that local manufacturers felt little or no impact on shipments, deliveries, or overall production levels as a result of the gasoline crunch. The majority of respondents expect tight gasoline supplies throughout the summer and the balance of 1979, but again anticipate minor effects, at most, on production.
Over the longer term, survey participants predict a further dropoff in business within the next six months. A substantial number of manufacturers surveyed foresee decreases in both new orders and shipments between now and January and are planning to decrease inventories accordingly. The situation does not appear favorable for local labor either, inasmuch as survey respondents indicate plans to reduce payrolls and cut the length of the workweek within the next six months.
On the price front, inflation continues as 67 percent of the respondents report paying higher prices for inputs again in July and nearly 50 percent are charging more for their products. No relief is foreseen over the next six months with 90 percent of the manufacturers anticipating higher raw materials costs and 64 percent intending to raise the prices of the goods they sell. Survey participants feel that gasoline shortages and rising fuel prices will be at least partially to blame for upward pressure on prices in general.
Area retail activity has improved somewhat this month after a sluggish June. Reports of current dollar sales for late July indicate volume to be approximately 5 percent above the corresponding period in 1978. Sales are generally reported to be on target and, consequently, inventory levels are good. Suburban branches of department stores appear to have returned to normal business volume once again, after a slow June owing to gasoline problems. Merchants feel the odd-even rationing plan in effect in all three states in the Third District has helped suburban sales somewhat.
Looking ahead to the next two quarters, retail merchants are generally pessimistic. Caution is being exercised and merchants predict that they will be fortunate to meet last year's sales levels as they expect to end the year on a sluggish note.
Business in the banking sector is generally good this month, according to area bankers. Total loan volume is about 5 percent above late July 1978 levels. Most of this strength comes from consumer loans though, while business loan activity is mixed. Bank executives contacted foresee a decline in both business and consumer loan demand over the next six months as the overall economy slips into a recession.
The prime rate in the Third District is back to 11 3/4 percent after a drop to 11 1/2 percent last month. Projections for the future indicate a decline in the prime by January 1980, possibly to as low as 11 percent. There is some speculation that the prime may increase 25 basis points before the drop begins though.