Beige Book Report: Philadelphia
May 14, 1980
Indications from the Third District in May point to a slowdown that is gaining steam and spreading to a variety of sectors. Manufacturers in the District say industrial activity has taken another large dip this month, and retailers report sluggish, but still better than anticipated, sales. Representatives of both sectors say the future holds only bleak prospects. District bankers say C&I loan volume is up from a year ago, but has virtually dropped off the board since March. Further declines are expected as the U.S. slips into a recession.
Area manufacturing activity appears to have slowed quite a bit this month, according to the most recent Business Outlook Survey. About half of the manufacturers polled in May say general business conditions are worse than they were in April, continuing the slump in the industrial sector that began nine months ago. Recent trends in specific indicators of business activity have been consistent with this general decline. Both new orders and shipments are down again and producers' backlogs have diminished substantially. Inventory liquidation has continued. On the employment front, almost a quarter of the respondents to the survey have trimmed their payrolls and cut working hours.
For the longer term, survey respondents are projecting only a marginal increase in overall business activity in the next six months. New orders are expected to increase, with shipments rising as well, but inventories will remain tight. Employers still foresee some cuts in the average workweek, with fewer predicting layoffs.
Prices are up again in May in the industrial sector. Input costs are higher this month for about two-thirds of the surveyed manufacturers, while prices of finished goods they sell have been increased by about half. As for the future, 71 percent of the respondents expect raw material costs to be higher by November and 62 percent plan price hikes for their products.
Area retailers report only slight growth in sales in April, with hard goods bearing the brunt of the slowdown. Current dollar sales are running 1 to 6 percent over year-ago figures, which is better than was generally anticipated. Most retailers surveyed had expected a decline in nominal terms of 1 to 2 percent, but balmy summer weather has bolstered sales to some degree. Having anticipated a slowdown, retailers cut inventories accordingly, so inventory-sales ratios are in good shape. All retailers contacted said collection of debt had slowed somewhat, but responses were mixed regarding consumer willingness to continue to buy on credit.
Local merchants are projecting a continued decline in sales through the next two quarters, with a possible pickup in December. They feel the election in November should help, as consumers have traditionally been optimistic after Presidential elections, and that the overall economy may start to show signs of recovery by year-end.
In the financial sector, bankers report mixed activity in May. Commercial loan volume is up 10 to 13 percent over a year ago, but activity in the last month has dropped off sharply. Consumer loans are down, as bankers continue to discourage retail borrowing. Looking ahead to the next six months, projections indicate that loan volume will continue to drop as the economy slips deeper into a recession.
Bankers in the Third District are currently quoting a prime rate of 17 1/2 percent. Projections of the prime show a continued drop, leaving the rate 300 to 600 basis points below its current level by the third quarter, and even lower by year-end.
Deposit flows at commercial banks are "not dangerously tight" at this point, and bankers anticipate improvement as interest rates fall. Many consumers are starting to move out of money market certificates, as yields drop, and into the longer-term thirty month certificates in order to lock in a higher return on their money.