January 29, 1980
Reports from the Third District in January indicate that business activity is mixed. Representatives of the industrial sector report continued decline in manufacturing and predict further slippage in the next six months. Retailers, on the other hand, are experiencing unexpectedly strong sales this month. In the financial sector, area bankers say consumer loan demand has been strong, but business borrowing is mixed. Interest rates have stabilized for the time being, but will probably drop slightly in the first half of the year.
Respondents to this month's Business Outlook Survey say the '80s have begun with further slippage in area manufacturing. About one-third of the manufacturers polled this month say general business conditions are worse than they were in December, while less than a tenth report improvement. In terms of specific indicators, new orders are down again in January, but shipments have remained stable. So, once again, producers' backlogs have diminished, and a commensurate cut in inventories is noted. On the jobs scene, payrolls have been pared slightly at area plants for the first time since the slump began some seven months ago, and many managers have cut working hours somewhat as well.
Looking ahead to the next six months, responding manufacturers predict further decay of general business conditions, as they've been doing since December '78. New orders are expected to increase only marginally between now and July, while a more significant pickup in shipments is forecast. The cautious mood of the respondents is reflected in their plans to maintain current inventory positions for a while and hold the line on hiring as well. Working hours will probably be trimmed fractionally in coming months.
Industrial prices are on the upswing again in January, according to survey participants. Over three-quarters of the manufacturers polled this month report paying higher prices for inputs than they did last month, and well over one-third say they are charging more for their finished products. For the longer term, almost 9 out of 10 respondents expect the cost of raw materials to be higher by midsummer, while about 8 out of 10 plan price hikes by that time for the goods they produce.
Area bankers contacted in January report strong consumer loan demand, but say business borrowing is mixed. Commercial loans are running between 1 and 19 percent ahead of January '79 levels, but are generally below plan. A Director of this Bank comments that inquiries about business loans are numerous, but that actual follow-throughs are relatively few. Looking ahead to the next six months, most bankers are anticipating a dip in business loans, as the economy in general slows down.
Interest rates appear to have stabilized, at least temporarily, in the Third District. The prime rate at all of the banks contacted remains at 15 1/4 percent, unchanged from its mid-November level. Projections of the prime call for a drop of about 100 basis points over the next six months, followed by further cuts which will leave the rate at about 12 1/4 percent by year-end.
Bankers say that deposit flows are adequate in January, but that the effect of the new two and a half year floating rate certificate is less than they'd hoped. Although response to the new instrument has been quick and enthusiastic, the certificates are attracting little new money, with as much as 75 percent of the funds used to buy them coming from other time deposits at the issuing bank. The minimum denomination on the certificates is generally $500.
Mortgages are still being made by banks in the District, with a good deal of nonprice rationing observed. Bankers say they have not seen, thus far, any improvement in the mortgage market as a result of the suspension of state usury ceilings effective January 1.
Area retail activity has remained strong thus far in January. Merchants report current dollar sales of 8 to 10 percent over year-ago figures, which is better than they anticipated. After strong Christmas sales in December, most merchants expected a slump as consumers became more cautious about their spending, but no curtailment has been observed as yet. Inventories are in "very good shape" because sales have been so much better than expected. No serious shortages have been reported.
Area retailers are cautiously optimistic about the next six months. The anticipated recession is overdue at this point, and the merchants contacted feel that if a slowdown does come, it may be only slight. They are not really anticipating any cutback, though, until late in the second quarter.