Beige Book Report: Philadelphia
October 10, 1979
Reports from the Third District indicate that business activity is mixed again in October. In the industrial sector, manufacturers have reported a fourth consecutive month of production cutbacks. At the same time, local retailers say sales are sluggish. Looking ahead, representatives of both sectors see softness in business conditions continuing throughout the year and on into 1980. Both production and retail sales are expected to hold their current levels through April. Bankers are a little more optimistic, however. Loan demand, which is currently soaring, is expected by many to remain strong as the nation slips into a recession and businesses turn to banks to meet their working capital requirements. The prime rate is currently 13 1/2 percent in the Third District.
Manufacturers responding to the October Business Outlook Survey report another major dropoff in local industrial activity. This is the fourth consecutive month in which business has significantly slowed for manufacturers. In terms of specific indicators, shipments are unchanged from September levels while new orders are off substantially. Thus, manufacturers' backlogs continue to shrink as they have done since June. The slowdown in production has led over 40 percent of the manufacturers surveyed in October to make further cuts in inventories. Local labor has yet to really feel the pinch though. Although the workweek has been trimmed at many area firms, payrolls have not as yet been cut as a result of the slippage.
Looking ahead to the next two quarters, survey respondents foresee further slowing in the industrial sector but expect recovery by April. By that time, manufacturers expect overall business activity to be about the same as it is now. New orders should be higher in six months than they are now, but shipments will remain steady, causing a build-up of unfilled orders. Plans to increase capital spending are also reported. No inventory rebuilding is forecast, however. In fact, further paring of stocks is anticipated. Local labor is expected, by April, to have felt some of the effects of the slowdown, too. Payrolls are forecast to be fractionally smaller by then, and the workweek will likely be shorter.
Inflation appears to have picked up in October in the local industrial sector. The cost of raw materials is up from September at over three-fourths of the firms surveyed this month, and the prices of finished goods are higher at over half. By April, 9 out of 10 respondents expect to be paying more for inputs, and 3 out of 4 plan to be charging more for the goods they produce.
Area bankers say business remains brisk in October. Consumer loans have not taken the dip many expected to see by now, and commercial loans are up from 7 to 25 percent over October '78 levels. It's difficult to say how much of the strength in business loan volume comes from a basically strong market though, as the banks reporting the biggest gains have been following aggressive pricing policies recently. This activity may be taken as an indication that no signs of a credit crunch have been observed as yet. However, it is the general opinion of the bankers contacted that the loan market will begin to tighten up within two months.
For the longer term, bankers contacted had differing views on where loan demand will be going over the next six months. Projections of business loan volume for early spring range from 8 to 9 percent below year-earlier levels to 18 percent above those levels. In favor of continued strength in demand are higher input costs that businesses will face as a result of continued inflation, the need to finance involuntary inventory accumulation, and slower turnover of receivables over the next two quarters. Moreover, interest rates will probably remain too high in the coming months for firms to want to refinance current obligations at fixed rates through nonbank sources. Thus, they will probably continue to go to their banks for money.
The prime rate at all of the banks contacted is currently 13 1/2 percent. Consistent with a wide range of loan demand forecasts, a broad range of interest rate forecasts is also reported. At one end of the spectrum, some bankers foresee the prime being bumped another 25 to 50 basis points in the near future, and then dropping to about 12 percent by April. Other forecasts, however, predict no reduction in the prime, but do see less frequent hikes. The prime rate may, according to those forecasts, hover around 14 percent six months from now.
Area retailers report some nominal growth in sales in October, but, after adjusting for inflation (by the LIFO price index) sales volume is just about even with year-ago levels or a little off. Current dollar sales are reported to range from 3 to 5 percent over October '78 sales. Merchants cite a general slowing of the economy as the cause of recent sluggishness, and point to slower collection rates on installment debt at their stores as evidence supporting this assertion. Retail inventories remain in good shape despite several months of soft sales, as merchants keep a sharp eye on their stock levels.
As for the future, local retailers remain cautious overall. They generally believe that the U.S. is in for a recession that may last a bit longer than many forecasters have been predicting, and are planning accordingly. Nominal sales next spring are expected to be 2 to 3 percent over year-earlier figures-probably flat in real terms. Retailers contacted plan to keep inventories trim in the coming months.