Beige Book Report: Philadelphia
August 18, 1982
Reports from the Third District in August fail to give any clear indication of the direction the local economy is taking. Manufacturing remains weak, retail sales have dropped, and business loan demand has tapered off in recent weeks. Area farmers are facing mixed crop yields, and tourist business, although good in some areas, is also spotty.
The outlook varies by industry. Despite persistent sluggishness in the industrial sector, manufacturers continue to look for an imminent recovery. Retailers also anticipate a pickup, but one that is mostly seasonal in nature. Bankers foresee further cuts in interest rates, but softening loan demand, as borrowers turn to long-term capital markets.
Agriculture
Third District crop yields will be mixed this year, according to
area agriculture officials. While the New Jersey tomato crop is
strong, and corn and soybeans are also doing well, several of the
area's major farm products will not turn in a good 1982 showing.
Most vegetable farmers, for example, will have a small harvest this
year, owing to record rainfall in early spring which delayed
plantings. That wet weather also forced hay growers to put off their
first cutting. Hence, they will get only two or three cuttings this
year, rather than the usual four. A severe coldsnap in early spring
damaged the New Jersey peach crop. Peach volume is currently running
17 percent below that of a year ago.
Area farm prices are generally strong, especially for those commodities in short supply, but farmers may not get to keep much of the money they take in. Rising distribution and production costs, especially interest expense, will keep the lid on farm income again this year. An official of the Pennsylvania Farmers Association predicts that total interest expense for farmers in 1982 will exceed the 1981 mark of 13.6 percent of gross income.
Manufacturing
Manufacturers responding to the August Business Outlook Survey
report that local industrial activity has stabilized this month
following a seasonal drop in July. This month's results point to
continued weakness in the industrial sector, which seems to have
bottomed out in February but has yet to show any real sign of
recovery. Both new orders and shipments dropped sharply under
seasonal pressure in July. In August, new orders have declined
slightly, while shipments have held steady, causing further
shrinkage of backlogs at area manufacturing plants. Reports of
inventory liquidation are still widespread and reductions in
payrolls and average workweek length persist.
Despite the continuing slump in industrial activity, more Outlook Survey respondents are optimistic about future business conditions than in June or July. Over three-quarters of participating manufacturers now expect business conditions to improve within six months, and there are widespread predictions of growing strength in both new orders and shipments. In response, local manufacturers plan to expand payrolls and working hours, but projections of weakness in both inventory growth and capital spending raise doubts about the real strength of the recovery.
The prevailing sluggishness in local manufacturing continues to have a stabilizing effect on industrial prices. At over 80 percent of participating firms, neither input nor finished goods prices have changed since July. Looking ahead, however, forecasts of continued stability in prices, apparent in the June and July surveys, have diminished somewhat this month.
Retail
As predicted by many retailers, neither the July tax cut nor the
Social Security increase has had a significant effect on consumer
purchases to date. In fact, sales have slipped considerably over the
last few weeks, and can now be described only as mixed. Reports of
current sales volume range from 5 percent below to slightly ahead of
a year ago, but sales are generally below retailer's expectations.
Merchants simply blame the lingering general economic slump for
current lackluster consumer performance.
Looking ahead, retail contacts see sales improving by year-end, and hope for a reasonably good holiday season. They concede, however, that even with a strong finish, they'll be lucky to break even on the year. They remain very cautious about inventory building, and have no plans to add to current stocks until a turnaround in sales is obvious. Presently, department store inventories are down from August '81 by as much as 10 percent.
Finance
Third District bankers say lending activity is mixed in August. The
recent decline in interest rates has apparently attracted some
borrowers to long-term debt instruments and put a damper on the
demand for business loans. Reports of C & I loan activity range from
slightly off to 7 percent ahead of a year ago, not disastrous but
definitely less robust than earlier this year. At the same time,
however, bankers have opened the door to consumer loans, and retail
borrowing, down by as much as 15 percent just six weeks ago, is now
running only about 1 percent under August 1981 levels. The outlook
for lending reflects a continuation of current developments. Bankers
expect that, as the economic picture shapes up, business borrowing
will drop further as stress borrowing fades. Further growth of
consumer loans is projected.
The prime rate has been lowered to 15 percent at Third District banks contacted this month, and local bankers are forecasting further cuts. Estimates of a trough in interest rates center around early- to mid-fall. At that time, bankers expect rates to firm up and begin to climb as business investment picks up.
Time deposits at Third District banks have maintained the surprising firmness that has been evident throughout 1982, and are now running as high as 13 percent above a year ago. Demand deposits are still running about 3 to 4 percent behind on a year-over-year basis.
Tourist Services
Businessmen at Third District vacation spots give mixed reviews of
the season so far. Seashore businessowners say early summer was
disastrous, with record rainfalls noted in many areas. Midsummer
business has been a bit better, but tight budgets have led many
families to shorten their vacations, resort to daytripping, and
generally pare expenditures. The strength of the U.S. dollar, vis-a-
vis the Canadian dollar, has been a particular problem in South
Jersey, a favorite vacation spot of Canadians. Overall, seashore
business is currently holding at about last year's level, but a boom
in late summer will be necessary to offset early season losses.
Mountain vacation spots in Pennsylvania, on the other hand, are having a good year. After a strong winter season, summer tourist trade in the Poconos is now well above most expectations. To be sure, the average stay at mountain resorts is shorter this year than last, but late summer and fall business is projected to be strong. Advance reservations are running 10 to 14 percent over a year ago, which should give Pocono businesses a good boost and help them finish well ahead of 1981.