Beige Book Report: Philadelphia
July 1, 1980
Reports from the Third District indicate that business activity for the month of June is sluggish. Business conditions in the industrial sector have declined significantly this month, while retailers report sales to be just even with a year ago. Looking ahead, manufacturers are expecting an upward swing six months from now, but local merchants say sales will remain flat, despite end-of-year Christmas buying. Area bankers say commercial loan volume is up, but by less than projected, and foresee little improvement this year. Interest rates are expected to continue their decline through the next two quarters.
Manufacturers responding to the June Business Outlook Survey report another significant decline in area manufacturing activity, extending the slump in the local industrial sector to a full year. Both new orders and shipments are down substantially as producers' backlogs continue to diminish. Inventory liquidation appears to have abated, however, at least temporarily. The pinch continues to be felt by area labor, with about one quarter of the respondents to the survey reporting decreased payrolls and half reporting a shorter average workweek.
For the longer term, survey participants are projecting a significant upward swing in general industrial business activity in the next six months. New orders and shipments are expected to increase; however, plans to add to inventories have not yet been made. Likewise, manufacturing managers foresee little change in employment, the average workweek, or expenditures on plant and equipment.
A Director of this Bank whose business is in the manufacturing sector feels that this cautious attitude is appropriate. He takes exception to the survey results, and does not expect recovery until 1981, pointing out that many of his customers anticipate a recession deeper than that of '73-'75.
Industrial prices are up again this month as nearly 60 percent of the survey respondents report paying more for inputs than they did in May and 40 percent report charging higher prices. Looking ahead to the balance of 1980, responding manufacturers expect inflation to continue. Over 80 percent anticipate increases in raw material prices within the next six months and 70 percent plan price hikes for the goods they sell.
Area retailers report this month's overall sales to be in the range of zero to 5 percent above those of June '79. Expectations were gloomy to begin with, though, so merchants are not unhappy with their current sales performance. Moreover, the bleak outlook early this year led many retailers to plan cautiously, so that even though sales have slowed recently, inventory-sales ratios are still healthy. Sales of soft goods-apparel and small household items-are fairly brisk, but big ticket items are very sluggish, owing at least partly to credit tightening. Credit sales in general are down slightly, with cash sales up, and collection of outstanding credit is reported to be slow.
Local department store executives are continuing their trend of recent months, and are planning cautiously and defensively. They believe "the other shoe has fallen" and are projecting flat sales through year-end, despite December Christmas buying. They feel that the current recession will be deeper than generally believed, and do not expect recovery until 1981.
Bankers contacted this month report sluggish loan activity. Reports of C&I loan volume range from 5 to 7 percent over year-ago figures, somewhat below projected volume for this period. Consumer loans, on the other hand, are flat, which contacts attribute to the continued restrictive posture taken toward retail lending. Looking ahead to the next two quarters, bankers are projecting little change in lending activity, as the economy slips deeper into recession.
Banks in the Third District are currently quoting a prime rate of 12 percent, and report a nominal amount of below-prime lending as a result of stiff competition for customers. Projections for the prime indicate a continued drop through the balance of 1980, leaving the rate about 200 basis points below its current level by the end of the year. Falling interest rates have had a positive effect on banks' deposit flows. Deposits at commercial banks have stabilized as rates have plummeted, but are still down compared to last June's levels.
Housing sales in the Third District have started to show some signs of life again, although new starts remain depressed. The increase in sales is attributed to increased mortgage availability and lower mortgage rates. Some 80 percent mortgages are now available at 12 to 13 percent. Housing prices had generally leveled off in January of this year, but are once again on the upswing, especially in prime areas. On the construction side, starts have not taken off again yet, as builders finish projects started late last year and hold back on new groundbreakings. One broker feels that developers will wait for two to three consecutive months of economic improvement before undertaking new construction.