Beige Book Report: Philadelphia
September 12, 1979
Indications from the Third District are that economic activity is mixed in September. Representatives of the industrial sector report further slippage this month, but at a reduced rate, and retail sales are sluggish. Bankers, however, report strong loan volume. For the longer term, contacts in all three sectors are bearish. A further downturn in manufacturing is anticipated, along with continued softness in retail sales. And, bankers expect that, as we move into a recession, loan demand will taper off as well.
Respondents to this month's Business Outlook Survey report further deterioration of general business conditions in the industrial sector, but at a reduced pace from that recorded in July and August. New orders are off fractionally in September, while shipments are up slightly. Consequently, producers' backlogs continue to shrink and inventories have taken another dip. Factory labor remains unaffected by the three-month old slowdown though, as neither payrolls nor weekly hours have been cut in September.
As for the future, responding manufacturers look for continued dampening of the business climate over the next two quarters, and appear to be bracing for a further slowdown. With both new orders and shipments projected to take significant drops between now and March, survey respondents are planning to trim the size of their work forces and cut working hours as well. Moreover, expenditures on plant and equipment are expected to be no higher in six months than they are right now, possibly indicating that manufacturers are finally taking the threat of a recession seriously.
On the inflation front, prices are up again in the local industrial sector. Two thirds of the executives polled in September report paying more for raw materials than they did in August, and half are charging more for their finished products. For the longer term, more of the same is expected. Nine out of 10 manufacturers are projecting higher inputs costs six months out, and 3 out of 4 are planning to boost the prices of the goods they sell.
Third District retailers report some growth in sales in September, but not enough to yield an increase after adjusting for inflation. Reports of current sales levels range from 3 to 6 percent over year- ago figures—about as expected on average. Merchants point to higher outlays by consumers for gasoline and an overall lack of confidence in the economy as factors that are keeping a lid on sales at this point. Retail inventories are in basically good shape despite the apparent sluggishness, a direct result of cautious planning in earlier months.
Looking ahead to the first quarter of 1980, local merchants are generally pretty cautious. They expect some gains to be posted between now and March, but none large enough to offset inflation, which they expect to be in the 8-10 percent range.
Area bankers say total loan demand is strong in September, with much of the strength coming from a pickup in business borrowing. Real estate and construction money is still very much in demand, and C&I loans are up between 10 and 14 percent from September '78 levels. Consumer loans are doing well also, in fact, too well, for bankers who are trying not to make many fixed-rate loans in anticipation of further interest rate hikes. Bankers contacted believe much of the strength in the business loan area stems from unplanned inventory accumulation in the industrial sector. A tapering off of loan demand towards the end of 1979 is projected, as manufacturers enter an inventory liquidation phase and consumers stop spending for autos and other durables.
A Director of this Bank confirms the reports of soaring loan demand, particularly for consumer and mortgage loans, and he sees no immediate slowdown.
The prime rate at all of the banks contacted this month is at 12 3/4 percent and expected to go higher soon. An increase of about 25 basis points is projected within 4-6 weeks, followed by a plateau lasting at least through the first 3 months of 1980.