Beige Book Report: Philadelphia
December 10, 1980
Indications from the Third District point to a slowdown in business activity for the month of December. This could mark the beginning of the second part of the "double-dip" recession many economists have been forecasting. Area manufacturers say industrial activity has taken a sharp downturn this month, but remain optimistic, anticipating a widespread upswing in general industrial activity by next June. Local retail merchants report real dollar sales to be even to slightly ahead of last year's levels, and look forward to moderately strong sales in 1981. In the financial sector, District bankers indicate sluggish loan activity. Business loan volume is generally flat, while consumer loans are down again in December. Area bankers forecast no change in consumer loans, but predict slight gains in business borrowing. On the residential construction side, sales have dropped off sharply owing to seasonal factors and tight mortgage money, according to area real estate contacts. Contractors and developers are holding off on new ground breakings until they are less uncertain about future mortgage rates.
Industrial Activity
Third District manufacturers responding to the December Business
Outlook Survey report a sharp downturn in general business activity
relative to November. This follows a three month respite from the
downward trend area industry has been in since mid-1979, and could
signal the start of the second part of the "double-dip" recession
many economists have been predicting. Supporting the reports of
decreased activity, both new orders and shipments are down
substantially. The employment situation looks dimmer as well as
payrolls have been cut fractionally and the average workweek has
been shortened again. Inventories, on the other hand, have remained
stable for the second month in a row.
As for the future, area manufacturers remain optimistic projecting a widespread upswing in overall industrial activity within the next six months. New orders and shipments are expected to increase and area manufacturers plan to make fractional additions to inventories. Labor, too, may get a boost as local manufacturers plan to increase their work forces and lengthen working hours by next June. Increased capital outlays are also projected as demand begins to grow.
On the inflation front, industrial prices are up again in December, as 52 percent of the respondents report paying more for raw materials than they did last month, and about one-fifth indicate charging higher prices for their finished goods. No relief from inflation is expected as better than 9 out of 10 of the managers surveyed anticipate input costs to rise by next June, and 8 out of 10 plan price hikes for the goods they sell.
Retail Activity
According to area retailers, December sales are mixed compared to
year-ago figures but pretty much as merchants had expected. Reports
of current dollar sales volume range from 0 to 9 percent above
December '79 levels, but after adjusting for inflation, these are
only small gains at best. However, the picture may not be as bleak
as it looks. For one thing, this year's sales are being compared to
the record volume of last December, when the economy was in a
healthier state. Also, inclement weather on "Black Friday," the day
after Thanksgiving and traditionally one of the biggest shopping
days of the year, kept many holiday shoppers at home, thus keeping
the lid on recent sales. Finally, most merchants started Christmas
promotions in mid-November; so, instead of posting large gains in
early December, many retailers have been experiencing small gains
for several weeks now, which may amount to the same thing.
The retail community is optimistic about holiday business in general, projecting Christmas sales to run 3 to 6 percent ahead of last year's levels. Looking ahead to 1981, retailers expect another moderately strong year and are hoping for sales gains of about 8 1/2 percent.
Financial Activity
Area bankers report sluggish loan activity in December. Reports of
C&I loan volume range from 1 percent below to 1 percent above year-ago figures. Business borrowing is generally below budget. Consumer
loans are down this month also, by 3 to 5 percent. For the longer
term, local bankers project commercial loans to increase by 3 to 4
percent within the next six months, while consumer loans are
expected to remain flat.
Third District bankers are currently quoting a prime rate of 19 percent. Projections of the prime indicate an expected turnabout from the recent trend of climbing rates. Cuts in the prime are expected to come soon, leaving the rate about 250 to 350 basis points below its current level by mid-1981.
Reports of deposit flows in the Third District indicate demand deposit levels to be down as much as 7 percent from year-ago figures, and savings deposits down 2 percent over the same period.
Housing
December seasonal factors have combined with tight mortgage money to
produce a further drop in housing sales this month, leaving current
sales volume 40 to 65 percent below June levels, according to area
brokers. As mortgage rates continue to climb, running 15 1/4 to 15
1/2 percent at the present time, more and more buyers are pulling
out of the market causing a slowdown in the upward spiral of
residential prices. At the same time, contractors and developers,
uncertain about the direction of future mortgage rates, are holding
off on new starts.