January 2, 1980
Reports from the Third District indicate that business activity is mixed in December. Manufacturers report another drop in activity this month, continuing a six month trend, and foresee more of the same in the first half of 1980. Retailers, on the other hand, were experiencing large sales gains through December 19 when a major unexpected snowstorm hit the area. They, too, fear a major slump early next year, and are planning accordingly. Area bankers say loan volume has been unexpectedly strong recently, but will probably taper off in January. Interest rates are expected to remain fairly stable through spring.
Respondents to this month's Business Outlook Survey have indicated another major drop in local industrial activity in December. Business at area manufacturing establishments alternately faltered and recovered in the first half of 1979, but has been slipping steadily now for about six months. Consistent with reports of the continuing slump, both new orders and shipments are down again this month, and backlogs continue to shrink. Inventory cutting is becoming more widespread, with stock levels down from November at half of the firms surveyed. Working hours have been cut at several area plants in response to the slowdown, but the number of workers on the job has not been affected as yet.
For the longer term, executives polled in December again foresee a worsening of the regional business climate over the coming six months, but still do not anticipate any real dip in specific indicators of regional business activity. Survey respondents do not expect new orders, shipments, or backlogs to be significantly different in June '80 than they are now. Their cautiousness is reflected, though, in plans to trim inventories and payrolls fractionally, and in the fact that about 2 out of 3 of the manufacturers responding to the survey this month plan to hold the line on capital spending throughout the first half of next year.
On the price front, industrial costs are up again in November. Input prices are up from last month at two-thirds of the responding firms in December, while prices charged for finished products have been raised at about one-third. As for the future, 9 out of 10 executives surveyed forecast higher costs for raw materials by summer, while 4 out of 5 plan to be charging more by then for the goods they sell.
Area department stores report strong growth in December, an increase over year-ago sales even after adjusting for inflation with the LIFO price index, which most consider appropriate for their purposes. Current dollar sales are reported to be 8 to 12 percent over December '78 volume. Christmas got off to a late start last year though, so these figures may overstate any real underlying buying strength. Moreover, an unexpected snowstorm hit the area on December 19th, and may have put a damper on sales from that point on. So, late season sales may prove to be less than hoped for.
Center city stores are once again leading the pack in terms of sales, but not at the expense of suburban stores which continue to do well also. Retail inventories are trim, although few merchants expect shortages. Department stores report strong sales of gold jewelry and energy-related items, but most big-ticket items, such as home appliances, are not selling well.
As for the future, local retailers are pessimistic. After such strong Christmas sales, most expect consumers to cut back considerably as the U.S. slips into a recession in early 1980. Only very modest increases in nominal sales are expected in the first half of the year. Merchants say they are adopting defensive inventory positions and planning cautiously.
In the financial sector, loan volume at area banks is up over year-ago levels, with most of the increase being attributed to commercial loans. Consumer loans are not suffering either, though. Bankers contacted were unable to give specific reasons why loan demand is so unexpectedly strong. However, they do say that neither seasonal factors nor inventory problems, either manufacturing or retail, are being considered as the source of the unusually brisk borrowing. Looking ahead to the first half of 1980, bankers are anticipating a drop-off in loan volume.
The prime rate at all of the banks contacted in December is currently 15-1/4 percent. Projections of the prime indicate a plateau through June, followed by large cuts, leaving the rate 300 to 400 basis points below its current level by the end of 1980.