Beige Book Report: Philadelphia
November 14, 1979
Reports from the Third District indicate that business activity is mixed again in November. Bankers are reporting strong loan volume, and expect interest rates to level out as the nation enters a recession. In the industrial sector, manufacturers continue to report production cutbacks and expect overall business conditions to continue to deteriorate. Retail sales, however, are up, with much of the increase being attributed to heavy promotional efforts. As for the future, representatives from all three sectors predict that the next six months will bring a substantial drop in business activity.
The downturn in local manufacturing activity has continued into its fifth month, according to respondents to the November Business Outlook Survey. New orders at the firms polled have dropped again, while shipments remain stable. Hence, producers' lead times continue to grow shorter, and manufacturers have once again pared inventory levels. Factory employment remains unaffected by the slowdown, however, with neither payrolls nor working hours being cut at local plants.
For the longer term, manufacturers surveyed in November foresee a continuation of present trends. Further deterioration in general business conditions is expected to occur over the next six months, with no improvement anticipated in either new orders or shipments. Consequently, no inventory rebuilding is forecast between now and late spring. And, while there should be no significant reduction in the size of work forces at area factories, a shortening of working hours is expected.
On the price front, inflation continues in the local industrial sector in November. Three out of five of the firms surveyed this month report paying more for raw materials than they did in October, and two out of five are charging more for the goods they produce. As for the future, 87 percent of the respondents expect to be facing higher costs for inputs in six months, and 68 percent plan to be charging more for their finished products by that time.
Retail sales in the area are reported to be "surprisingly strong" at this time. Current dollar sales at local department stores are reported to be 5 to 6 percent over year-ago levels, and generally slightly better than had been anticipated for this period. Merchants say this is because the long-awaited recession they had been planning for has failed to materialize thus far. Another factor, however, has been heavy promotional efforts on the part of many retailers in the area. Aggressive promotion and pricing policies have been pursued recently in an effort to trim inventories somewhat. Inventory carrying costs have become prohibitive with recent interest rate hikes, according to merchants contacted, and the cost of financing stock now outweighs the income that stands to be lost should they be caught in an inventory-short position. Retailers emphasize that fear of a recession is not their primary reason for cutting inventories.
Looking ahead to the next six months, local merchants are moderately optimistic. Sales should pick up somewhat with the coming of the Christmas season, but year-over-year comparisons for December will be misleading, according to one source, because last Christmas was such a boom. Sales are expected to be sluggish to moderate in the first half of 1980 with increases over year-earlier levels of 2 to 5 percent anticipated.
Bankers contacted say corporate and consumer loan demand is still strong. Business loan volume is on target or higher at most commercial banks, while consumer borrowing is up more than 10 percent over last year. Area bankers, in response to the events which occurred in early October, have tightened credit considerably and are not aggressively pursuing corporate or consumer loans at this point. Speculative loans are being avoided, and maturities are being reduced where possible. Mortgages are still being made by commercial banks, but some nonprice rationing is observed. The rate being charged for mortgages is close to the usury limit at most banks and downpayments required are in the 25 to 50 percent range.
Looking ahead, most contacts are forecasting a dip in loan activity over the next six months, as the economy moves into a downswing. Projections for the prime rate (currently 15 1/2 percent at all of the banks contacted) indicate a slight increase, followed by a plateau through the first quarter of 1980.