Beige Book Report: Philadelphia
March 23, 1982
Indications from the Third District in March are that the economic slump is bottoming out for some industries, and that the economy may be on the verge of a turnaround. District manufacturers say the pace of industrial activity held steady this month, bolstered mainly by nondurables. Retail merchants say things are just about where they were a year ago as well, but hope for a push as they enter the Spring selling season. Bankers report that business borrowing is flat. The only real sour note comes from the homebuilding industry where things are simply described as "worse-not better".
Third District businessmen are reasonably optimistic, but not overly so. Manufacturers predict a pickup soon, but are a little less enthusiastic than they were a month ago. Retailers, likewise see some strength, but not a lot. Bankers anticipate little in the way of loan growth, but are forecasting healthy deposit flows and lower interest rates, at least for the near term.
Construction and Real Estate
Area homebuilders continue to suffer as high mortgage rates and
other factors are keeping away buyers in droves. "Other factors,"
according to one contact in New Jersey, include uncertainty about
interest rates, inflation, and jobs. Although traffic is up slightly
through new homes, few people are buying. If January and February
are any indication of things to come, New Jersey housing starts may
fall below 10,000 in 1982, or less than half of the 1973-75
recession level. There is some feeling that unless there is some
improvement within 30 to 60 days, many subcontractors will have to
fold.
Manufacturing
Respondents to the most recent Business Outlook Survey say the six
month slump in area industrial activity seems to be bottoming out.
Although business in the durable goods industries continues to sag,
a pickup in nondurables has given a rosier complexion to the overall
industrial outlook. Specific indications of a leveling off of the
downturn include higher levels of new orders and shipments, both of
which have rebounded from their winter trough, and less prevalent
reports of payroll cuts. Inventories, on the other hand, are still
being drawn down, paced by sharp reductions in the durables sector.
Looking ahead, manufacturing executives polled this month are still optimistic, but, in spite of the apparent turnaround, their outlook has softened. While general business conditions are expected to improve by September at over 50 percent of the firms sampled, a small but significant number of respondents now foresee a drop in activity. Strong growth in new orders and shipments is still widely expected, although not as widely as in recent surveys. Producers remain very cautious, and are planning little expansion of either inventories or capital expenditures before late summer. Any increased demand for their goods will be satisfied by hiring new workers and lengthening hours.
Industrial price hikes are more prevalent in March. Over one-third of the manufacturers responding to the survey this month report higher costs, and nearly one-fourth say they are charging more for the goods they sell. There are widespread expectations of further price inflation over the next six months as well. More than 75 percent of those polled are predicting higher prices for raw materials by September, and over 50 percent are planning to raise the price of their finished goods.
Retail
March department store sales are looking fairly grim at this point,
especially so as they come on the heels of a disastrous January and
barely adequate February. Sales volume is running just about even
with year-ago levels. Sales analysts say consumers are now receiving
their winter fuel bills, and are spending their money on oil, gas,
and electricity rather than spring clothing. An early Easter this
year should give a boost to sales in late March though, and the
month could turn in an overall performance 6 to 7 percent better
than a year ago. Retail inventories are a little heavy at some
stores, but, in general, are pretty clean.
Looking ahead to the next six months, retailers seem to be planning for a fairly tough second quarter and only a modest third quarter. Summer sales are expected to run 2 to 5 percent ahead of year- earlier volume. Many merchants are less than optimistic simply because they see nothing in the near term to turn the consumer around.
Financial
Third District banking contacts say business loan volume is up
between 3 and 10 percent from a year ago, but has flattened out in
recent months. Consumer loans are off substantially, but mostly by
design. As for the future, area bankers foresee continued steadiness
for C&I loans, now that inventories have been worked off in many
industries. A change in the mix of funding over the next six months,
away from bank loans and into bonds, could also keep the lid on
business borrowing at banks. The outlook for consumer loans is
actually a little brighter this month. Many Philadelphia banks are
setting up card operations in Delaware, where usury laws were
abolished last year. Those banks hope to pick up new retail business
later this year, thereby giving consumer borrowing in this area a
shot in the arm.
Third District bankers are in agreement that a weak economy, dropping inflation, and a moderation of private credit demands will continue to draw interest rates down, with the prime rate, currently at 16 1/2 percent, dropping another 200 to 250 basis points. Estimates of the timing of a trough in interest rates range from June to September. As the economy turns the corner, rates are expected to start climbing again, unless a solution to the Federal budget dilemma becomes apparent. The recent bulge in Ml is expected to work itself out with little permanent effect on interest rates.
Deposit flows at area banks have held up surprisingly well in 1982, despite weakness in the economy and market rates still running well above passbook and statement savings yields. Demand deposits have dropped only slightly from high year-end levels, while total time and savings have grown. The only explanation offered for the apparent insensitivity of savings to interest rates has been that the precautionary demand for money has increased in the last few months.