Beige Book Report: Philadelphia
June 23, 1982
Indications from the Third District are mixed in June. Reports from the industrial sector continue to point to a bottoming out, but signs of growth are few and far between. Industrial prices continue to reflect that sluggishness. Retail business is sporadic, with large gains in May being offset by a weak June. In the financial sector, bankers say business borrowing is strong and deposit flows are reasonably good.
As for the future, Third District businessmen are optimistic but cautious. Manufacturers anticipate a pickup over the next six months, but not one strong enough to warrant increased capital spending or significant inventory building. Retailers seem to agree. They project some gains, but none large enough to really signal a recovery. They, too, plan to keep the lid on inventories. Area bankers have mixed views about business over the next six months, mostly as a result of widely variant interest rate forecasts.
Manufacturing
Manufacturers responding to the June Business Outlook Survey say
their industry is still in a lull. Industrial activity has remained
virtually unchanged for four consecutive months now. A note of
encouragement comes from the durables sector, however, which appears
finally to have stabilized. Specific indicators show that new orders
and factory shipments both posted small gains in June. As a result,
the pace of inventory liquidation, although still significant, has
tapered off somewhat after reaching a two-year peak in May. Labor's
situation has not improved, however, with cutbacks in payrolls and
working hours still being reported.
The dampness of the current business climate seems to have only slightly affected survey participants' outlooks; about 70 percent still see clear sailing ahead. There is widespread anticipation of gains in shipments and new orders between now and year-end, and manufacturers are planning to expand both their work forces and the length of the average workweek to some degree. Respondents also predict an end to the inventory run off, but are not projecting a recovery strong enough to warrant a serious increase in plant and equipment spending.
Industrial prices, which were stable in May, are holding steady in June too. And, while some area manufacturers foresee some renewal of inflation over the next two quarters, at least some of the present price sluggishness is expected to persist. In June, a larger portion of respondents than at any other time since the last months of the 1973-75 recession say that both raw material costs and finished good prices will remain steady through the balance of 1982.
Retail
Area department stores turned in a strong showing in May, but
primarily as a result of heavy promotion. Sales through the first
half of June have been fairly slack, and May gains, some as high as
12 percent, are being partially offset. Even so, year-over-year
gains for the May-June period are expected to be in the neighborhood
of five percent. Reasons for the current dampness in department
store sales include unseasonably wet weather and a "DON'T buy now"
consumer psychology, a sharp contrast to a few years ago when the
public believed in "buy now" to avoid price hikes. With the
inflation rate down, consumers now tend to put off purchases and
wait for price markdowns. As a result, retail margins are under the
gun.
Looking ahead to the balance of 1982, retailers are very cautious. Although some small sales gains are anticipated, merchants generally don't predict a strong surge until at least the fourth quarter. The tax cut and Social Security increase are expected to go into further rebuilding of balance sheets. As a result, retailers are keeping very tight stocks, to the point of causing some spot shortages of certain goods. No plans for inventory building are evident.
Banking
Third District bankers say retail borrowing is still off
substantially from a year ago, but business loan volume is strong.
Reports this month put current C&I loan volume from 8.5 to 12.5
percent ahead of June 1981 levels. Much of that strength, according
to contacts, comes from businesses barred from the bond market by
the high cost of long-term capital.
Bankers' views on interest rates have turned mixed since the last Redbook, and some now believe we've already seen the trough of the current interest rate cycle. Forecasts of the prime, which now stands at 16.5 percent, range from a 250 basis point drop between now and year-end to a 200 basis point increase by that time. Uncertainty over whether the Fed will bring monetary aggregates into line with targets seems to be the source of the variance in the forecasts.
Loan demand forecasts for the next six months depend heavily on the direction of interest rate movements. With slack demand for retail inventory financing expected and a possible end to stress borrowing, some bankers believe that a further decline in rates, drawing customers to the bond market, would cause the bottom to drop out of the commercial loan market. Without that decline in interest rates, though, loan volume will probably hold up, they say.
Deposit flows in the Third District are mixed but improving. Demand deposits have been picking up at major banks recently, but are still about 3 percent off on a year-to-year basis. Time and savings deposits are ahead of year-ago levels by about 11 percent. Sales of both 91-day money market certificates and 42-month ceiling-free deposits have been less than dramatic.