Beige Book Report: Philadelphia
November 16, 1982
Reports from the Third District in November point to mixed local economic conditions. Manufacturing is showing signs of a hiatus after a short recovery in October, but retail sales have perked up somewhat. Mixed loan activity is reported by area bankers. Mortgage rates have dropped, giving the housing sector a boost.
Third District businessmen are very cautious about the prospects for improvement over the next six months. A weak recovery is expected in the manufacturing sector while a moderate pickup is expected in retailing. Bankers foresee lower interest rates and slipping business loan demand.
Construction and Real Estate
Spurred by a rapid decline in mortgage rates, the Third District
housing market has revived substantially in the last six weeks
according to industry contacts. Conventional mortgage rates have
dropped into the 13 to 14.50 percent range, pushing housing activity
above the disastrous levels of a year ago. Market conditions,
however, are still described as soft by area real estate brokers.
Sales are reportedly running somewhat behind those of a "normal"
fall and contacts say that mortgage rates in the neighborhood of 12
percent are necessary to induce buyers to enter the market in force.
Most of the sales activity is in pre-owned homes. With new home
prices depressed, builders report little improvement in the market
for new construction; housing starts remain at a virtual standstill.
Manufacturing
Manufacturers participating in the November Business Outlook Survey
report that local industrial activity, which showed marked
improvement in October, has slipped marginally this month. The gains
indicated in the October survey were the most widespread in over a
year and the only significant improvement noted thus far in 1982. It
is evident from the latest survey, however, that area industry
continues to struggle. New orders have held steady in November, but
shipments, after two months of steady growth, have fallen off
slightly. Manufacturers continue to reduce industrial payrolls and
have also cut back again on working hours. In addition, inventory
liquidation is still pervasive.
Looking ahead, respondents are still very optimistic that expansion in the industrial sector will resume over the next six months. Almost four out of five participants project a strengthening in general activity between now and May, characterized by widespread gains in new orders and shipments, along with growing backlogs. But there is little feeling that inventory rebuilding is in the picture yet. Plans for capital spending remain weak, emphasizing respondents' caution regarding the recovery.
The prices firms charge for their own products dropped marginally in both October and November, the first price cuts in area manufacturing since the end of the 1973-75 recession. Input costs, on the other hand, remain largely unchanged from their September levels. Manufacturers predict that between now and May, as the industrial sector rebuilds, prices of both raw materials and finished goods will begin to rise again.
Retail
Sales at department stores in the Third District are beginning to
show more life. Volume has improved since September and now ranges
from zero to four percent above the levels of a year ago. Retailers
say, however, that in light of the poor showing by area stores in
1981, sales activity is still very weak. Local merchants, who
expected the upswing, indicate that much of the spending is for
promotional items, lower-priced luxury goods, and less-expensive
hardgoods such as kitchen appliances.
Retail contacts continue to be cautious about sales over the coming months. The present uptempo buying is expected to continue through mid-December, when a brisk holiday season should kick in. Gains for 1982 on the whole, however, are projected to be on the order of only three to four percent. Merchants foresee a slow pickup continuing into the second quarter of 1983, resulting in sales two to six percent above year-earlier volume by May.
Retail inventories have been kept trim in response to the slow activity prevalent through most of this year, and are now slightly below last year's levels. Retailers have no plans to alter stock levels in the near term.
Finance
Third District loan activity has turned mixed recently after
increasing through early October. A swing to long-term corporate
debt, facilitated by lower interest rates and declining inventory
financing requirements, has slackened the demand for business
borrowing. As a result, C&I loan volume has slipped since the last
Redbook. Current estimates put commercial lending only four to five
percentage points ahead of last November and a little below bankers'
expectations. Consumer loans, as expected, are seeing more action
again this month, due mainly to the drop in interest rates on
consumer loans and an increased effort by local bankers. The volume
of retail loans, however, remains well below year-ago figures.
Bankers are forecasting a continuation of present trends in area lending over the next six months, depending on the strength and timing of the expected recovery. Less distress borrowing and increased reliance on the corporate bond market should soften business loan demand even further. Consumer borrowing will probably grow strongly, according to contacts, as both lenders and borrowers find retail loans more attractive.
The prime rate at Third District banks has dropped to 12 percent from 13.50 percent in September. A downward trend is expected to pull the prime down as far as 10 percent sometime late in the second quarter of 1983 before it firms up. Other lending rates at area banks, including mortgage rates, are expected to follow suit.
Deposit flows in the Third District appear healthy in November. Demand deposits are up sharply since September; bankers attribute this jump to slow reinvestment of maturing All Savers' dollars. Time deposits have improved as well, especially the new 7-31 day time deposits, and are now as high as 14 percent above last year at this time.