Beige Book Report: Philadelphia
September 29, 1982
Indications from the Third District are mixed but point to continued weakness in the local economy overall. Conditions in the manufacturing sector still show no conclusive signs of a turnaround, and retail sales are sluggish at best. In the banking sector, loan demand has risen and a drop in interest rates is reported. The home building industry, despite a drop in mortgage rates, remains in very poor shape.
The outlook for some recovery in the next six months is generally optimistic, but cautious, across all industries. Both manufacturers and retailers are certain that improvement will occur, but are planning on it being slow and late starting. Bankers expect a hesitant recovery, as well, with further distress borrowing pushing up loan volume.
Construction and Real Estate
The housing market in the Third District remains mired in the slump
that has plagued it for well over a year now, according to area real
estate brokers. Industry contacts report some recent improvement in
market conditions, highlighted by a dip in mortgage rates to the 14
to 15.25 percent range. Buyers, however, apparently still view rates
as too high to buy. Traffic through new and older homes is up a
little, but sales are still below year-ago levels by as much as 50
percent. In addition, nearly all current sales are of previously
owned homes. As a result, housing starts are at a virtual stand
still as builders react to stalled sales and declining new home
prices.
Manufacturing
Respondents to the September Business Outlook Survey report that
business conditions in the local manufacturing sector are unchanged
from August. Third District industry continues to exhibit the
lingering weakness that has been evident for the last seven months.
While reports of improvement in manufacturing conditions have been
on the rise recently, there are still no firm indications that the
industrial sector has begun to really recover. New orders and
shipments show modest growth, their first gains since June, but
shipments have again outpaced new orders and forced producers'
backlogs down further. Cutbacks in both working hours and the
factory work force are reported again this month, and widespread
reports of stock level reductions indicate that liquidation of
manufacturing inventories has not yet showed.
Survey participants are still highly optimistic that a recovery will occur within six months, but appear to be maintaining a cautious stance while awaiting further signs of strength. Nearly 80 percent of the businessmen polled are looking for improved conditions over the next six months. New orders are expected to take off, and, with shipments projected to show slightly less growth, growing backlogs and longer delivery times are foreseen. Producers say the anticipated spurt in activity between now and March will push payrolls and working hours upward and bring inventories into check. But, reflecting continued caution, there is little stock building planned, and capital spending increases will be kept to a minimum.
Industrial prices are holding steady again in September, having shown little inflationary movement at all since April. Flat input and finished good prices are reported at well over 80 percent of responding firms this month. As for the next six months, the projected turnaround in manufacturing activity is expected to rejuvenate inflation but manufacturers foresee only moderate increases in both the cost of raw materials and the prices they charge for their own products.
Retail
Department store sales, which appear to have stabilized somewhat
since the last Redbook, are mixed. The uncertainty about jobs and
income that has kept consumers away from retail outlets all summer
continues to put a damper on spending. Retail sales volume is now
running from about one percent below to slightly above that of a
year ago, but well below the expectations of merchants. Retailers
had been looking for a "back to school" surge in September to pump
up sales. Current reports, however, have these soft goods moving
sluggishly and most other lines showing even less life.
Looking ahead, weak sales volume is expected to linger on until a projected holiday surge in December. End-of year forecasts are in the 1 to 4 percent range. A Director of this bank, however, notes that small gains over last year's fourth-quarter sales will not be a strong positive signal, as last year's sales were less than robust. Nevertheless, contacts are "guardedly optimistic" that a weak recovery will finally take hold in three to four months, and that sales will climb by two to five percent above year-earlier levels by early spring. Merchants remain cautious about inventories, currently lean and generally below last year's levels, and plan to maintain the present tightness for at least the next six months.
Finance
Third District bankers report improved loan activity in September.
Commercial lending inched upward this month, pushed along at least
partly by increased distress borrowing that outweighed the recent
shift toward long-term debt. According to banking contacts, the
volume of business loans is ahead of year-ago figures by as much as
11 percent, slightly better than lenders had anticipated. Retail
loans, held down by design for most of this year, have increased
recently in response to lower interest rates, but are still well
below last September's levels. As for the future, indications that
recovery will be weak have changed bankers' outlooks for Third
District lending activity. More distress borrowing is now expected
to keep C&I loan volume on the rise in the near future, and growth
in consumer loans is also projected to continue as long as interest
rates don't begin to rise again.
Area bankers have lowered their prime rate to 13.50 percent during September and foresee it dropping further if the recovery continues to sputter. Lenders are now predicting that the prime may go down to 12 percent before leveling off. The expected timing of the trough in interest rates has been pushed back into early 1983 when the projected recovery is forecast to be underway.
Deposit flows in the Third District show a few signs of minor slippage. Time deposits are not as strong as in recent months, but are still 10 to 12 percent higher than a year ago. Demand deposits are reported to be mixed, with some bankers reporting a loss of deposit dollars to various interest bearing assets, including the new 7-31 day time deposit.