March 25, 1981
Reports from the Third District indicate that business activity for the month of March is sluggish to mixed. Area manufacturers say industrial activity is showing some signs of expansion in March but has remained basically unchanged for the third consecutive month. The continued stability in manufacturing activity may have put a halt, at least temporarily, to cuts in factory employment observed since last April. As for the future, manufacturers anticipate a sharp upswing within the next six months which may give labor a boost as well. Retail sales are up overall in March, but a mass transit strike in the Philadelphia metropolitan area has dropped sales in downtown stores 50 percent. Looking ahead, retailers are a bit more optimistic than they have been in recent months, anticipating increased sales by September. In the financial sector, area bankers report sluggish loan activity. Consumer loans are down from a year ago, while C&I loan volume is slightly better, but still not strong. In efforts to bolster business loan demand, many banks have increased below-prime lending activity and are offering fixed- rate loans to businesses that want them. In the coal industry, the Third District will feel some impact should the United Mine Workers call a general strike on March 27, as planned. Area utility companies and manufacturers appear ready, however, having stockpiled supplies that would last one to three months.
Industrial
Area industrial activity is showing some signs of expansion in
March, but has, according to the respondents to the latest Business
Outlook Survey, remained basically unchanged for the third month in
a row. With these results in, it appears that the first quarter of
1981, in general, has been a period of little or no growth for Third
District industry. In terms of specific indicators this month, new
orders and shipments are up from February. Inventories, however,
have held steady for the fifth consecutive month, as local
manufacturers may be waiting for stronger signals on the economy
before building their stock levels. As for labor, the continued
stability in area manufacturing activity may have put a halt, at
least temporarily, to the cuts in factory employment observed since
last April. Survey participants report no real change in their
payrolls or the average workweek over last month.
For the longer term, respondents to the survey continue to be optimistic, anticipating a sharp upswing in general industrial activity within the next six months. Over one-half of the survey participants expect new orders and shipments to grow between now and September, and, as production pick ups, manufacturers plan to increase factory payrolls and lengthen the average workweek a bit. Higher expenditures on plant and equipment are also forecast.
On the inflation front, industrial prices have jumped again in the Third District, as over one-half of the survey respondents report paying more for raw materials than they did last month, and about one-fifth say they are charging more for their finished products. Prices are expected to continue climbing, as 9 out of 10 of the survey participants anticipate higher input costs by September and nearly 8 out of 10 plan price hikes for the goods they sell.
Retail
The Philadelphia metropolitan area has been enduring a mass transit
strike since March 15, as Transport Workers Union leaders and SEPTA
(Southeastern Pennsylvania Transportation Authority) officials try
to work out a new contract agreement. Downtown Philadelphia stores
have been hit hard by the strike, with shopkeepers reporting daily
sales down 50 percent from pre-strike levels. Spokesmen for major
area retail chains estimate that their center city department stores
account for only about 20 to 25 percent of their companies' total
sales volume though, and that lost sales in center city have been
made up for, in part, by increased volume in suburban stores. Many
local merchants have reduced their evening hours for the duration of
the strike. Although the strike will probably have only temporary
effects on the retail community, some longer-term damage may be done
as well. As a Director of this Bank notes, merchants "can't be sure
if consumers will maintain the same willingness to spend" that they
displayed a few weeks ago.
Outside of the downtown area, March sales are up over last year's levels, about 7 to 10 percent, owing mainly to new spring lines and growing consumer confidence, according to area contacts. Sales of soft goods—apparel and small household items—continue to be strong, with big ticket items starting to pick-up as well.
As for the future, area retailers are a bit more optimistic about the second half of 1981 than they've been in recent months, expecting sales to run at least 3 percent above year-ago figures. According to some contacts, consumer confidence in the Reagan Administration is growing, as "they try to get a handle on inflation." Area retailers are keeping the lid on inventories, though, and plan no changes for stock levels, hoping to keep inventory-sales ratios healthy.
Financial
Area bankers report sluggish-to-mixed loan activity in March.
Consumer loans are down 14 to 16 percent from a year ago, mainly
because banks continue to take a restrictive posture towards retail
lending. Business loan volume is better, but still not strong.
Reports of C&I loan activity range from 4 percent below to 6 percent
above March 1980 levels, which is in-line with bankers' expectations
for the most part.
In an effort to bolster business loan demand, many banks have increased below-prime lending activity and are also offering fixed- rate loans to businesses that want them. Takers for fixed-rate loans may be scarce, though. One reason cited for the weak loan demand was that many businesses have put off borrowing for six months or so, when they expect interest rates to be significantly lower.
Third District bankers are currently quoting a prime rate of 17 1/2 percent. They, like area businessmen, expect the prime to continue to drop, leaving the rate 200 to 300 basis points below its current level by September.
Two developments have occurred since the last Redbook in the Third District financial sector. The first took place in Delaware where Governor Pete du Pont signed into law the Financial Center Development Act, eliminating all usury ceilings in the state, allowing variable rate consumer loans to be made, allowing banks to charge fees for the use of credit cards, and giving tax breaks to banks establishing operations in Delaware. Two major New York banks have already set plans in motion to move credit card operations to the state, and, although no major Philadelphia banks have announced definite intentions to follow suit, they are carefully examining the costs and benefits of doing so.
Also this month, in attempts to match the advantages offered to depositors by money market funds, a major mutual savings bank in Philadelphia started offering a six-month savings certificate with a floating rate that was to be tied to the six-month T- bill rate and change weekly. The $10,000 certificate was available to savers with at least $5,000, who could then borrow the balance from the bank. The certificate was pulled from the market after only one day, however, when the FDIC ruled that the terms violated a number of regulations. There were a few actual sales though, and those buyers were given a choice of converting to a conventional six-month money market certificate or taking a refund.
Coal
Pennsylvania is a major coal-producing state, and the Third District
will feel some impact should the United Mine Workers call a general
strike March 27, as planned. Area utility companies and
manufacturers appear ready, however. According to a survey polling
local manufacturing executives, only about 14 percent of the
respondents use coal directly in their businesses. About 5 percent
of the survey participants report stockpiling coal in anticipation
of a strike and have supplies that would last one to three months.
As for utilities, a strike this month would not have an immediate
impact. Electric utilities report having an 80- to 90-day stockpile
of coal and, with the winter heating season coming to an end, power
consumption will be falling off. Area utilities also have the
capacity to produce electricity using oil-fired boilers, should the
coal run out. Subsequently, they are not expecting to find it
necessary to cut back power.