November 10, 1981
Reports from the Third District indicate a slowdown in general business activity for the month of November. Manufacturers in the District say industrial activity has dropped off quite a bit this month, but anticipate an upturn in the industrial sector by mid-1982. Local retail merchants report weak sales performance in November but are gearing up for a strong Christmas season. As for the new year, the current trend of weak sales is expected to continue with a slight pick up by next fall. 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. Looking ahead to May, Third District bankers expect modest increases in overall loan activity. On the residential construction scene, sales are off sharply again this month as high mortgage rates have discouraged many buyers. Contractors and developers are holding off on new groundbreakings until sales pick up.
Industrial
Area manufacturing activity appears to have slowed quite a bit this
month, according to the most recent Business Outlook Survey. About
45 percent of the manufacturers polled in November say industrial
business conditions are worse then they were in October, while only
about 10 percent report improvement. In terms of specific
indicators, new orders have dropped significantly, for the first
time in three months, with shipments down also, but to a lesser
degree. Hence, backlogs continue to shrink at over 40 percent of the
firms surveyed, and a commensurate cut in inventories is noted. As
for labor, the situation appears to have worsened, as nearly 40
percent of the manufacturers surveyed report cuts in factory work
forces and reductions in working hours.
Looking ahead, respondents to the survey are optimistic, predicting an upswing in general industrial activity by May. New orders and shipments are expected to show widespread improvement over the next six months, and, as production picks up, many manufacturers anticipate adding to their payrolls, lengthening the workweek, and increasing capital expenditures. Despite the anticipated strength, though, manufacturers plan to keep a lid on inventories.
Inflation continues in the local industrial sector in November, according to the survey, but price hikes are less prevalent this month than they've been in some time. Just over one-third of the respondents report paying higher input costs than they did in October, and only about one-tenth say they are charging more for their finished products. Manufacturers expect inflation to rekindle in the near future, however, as three-quarters of the respondents expect to be paying more for raw materials by May and nearly two-thirds plan to raise the prices of the goods they sell.
Retail Area retailers say sales are off to a weak start in November and little to no improvement is expected for the rest of the month. Currently, sales are running about 9 percent over November '80 levels, in nominal terms. In efforts to boost their volumes, District merchants have run big promotional campaigns, but November sales are still below expectations. Local retailers attribute the sluggishness to, among other things, unseasonally mild weather which has discouraged consumers from buying heavy winter clothing. Credit card sales are up over last year and collections are slowing but remain good.
As for the future, Third District merchants are anticipating a strong Christmas season, but are somewhat bearish about 1982. Area merchants expect the current trend of weak sales to continue into the new year, projecting sales to increase by, at best, 3 1/2 to 5 percent. As a Director of this Bank in the retail business notes, area merchants will have to fight hard for business through the spring.
Retail inventories are healthy at this point, despite November's softness. Inventories are at peak levels now as area retailers gear up for a strong Christmas season.
Financial
Third District bankers report sluggish-to-mixed loan activity in
November. Consumer loan volume is down by as much as 21 percent from
last year's figures, mainly because banks continue to take a
restrictive posture toward retail lending. Business loan volume is
better but still not strong. C&I loan activity is running between 8
and 11 percent ahead of November 1980 levels. In attempts to bolster
their commercial loan volume, some area bankers report a nominal
amount of below-prime lending. For the most part, however, business
borrowing remains in line with bankers' expectations. Consumer loan
activity is well below budget. Looking ahead, contacts expect
commercial loans to post only modest, if any, gains of up to 5
percent over the next six months and retail loans are expected to
pick up slightly as well.
Reports of deposit flows in the Third District indicate that demand deposit levels are down about 11 percent from year ago figures. Time and saving deposits, on the other hand, are up slightly and generally as planned. Demand for all-savers certificates, introduced October 1, got off to a good start, but fell short of area bankers' projections. Demand for the certificates appears to be gaining momentum again though, as contacts note a slow, steady growth in their volumes. Of the money going into all-savers certificates, 35 to 40 percent is estimated by bankers to be new.
Area bankers are currently quoting a prime rate of 17 1/2 percent. Projections of the prime over the next six months are mixed; some Third District bankers expect the rate to drop by 150 to 250 basis points, while others anticipate a hike in the rate to 18 1/2 percent by May when they expect the recovery to be underway. On October 27, Philadelphia's First Pennsylvania Bank announced that it was raising the interest rate on MasterCard loans to 19.8 percent, 4.8 points above the legal limit in Pennsylvania. In making the move, the bank is relying on the "most favored lender" doctrine. Neither state nor federal regulators have indicated whether they will fight the move.
Housing
November seasonal factors have combined with tight mortgage money to
produce a further drop in housing sales this month, according to
area real estate brokers. New residential sales are reported to be
down 90 percent from November '80 figures, while resales have
dropped by 50 percent. Prices are said to be softening, but mortgage
rates of 18 to 19 1/2 percent have kept most buyers out of the
market. Area contacts have cut their sales forces 15 to 20 percent
and are beginning to put their own capital into their business,
hoping to hold on until rates slide back down. In the meantime,
contractors and developers are holding off on new groundbreakings
until sales pickup.