Beige Book Report: Philadelphia
December 15, 1982
Indications from the Third District are mixed in December. Activity in the industrial sector declined fractionally from November levels and manufacturing prices reflect that slump. Retailers say spending has risen slightly since the last Redbook but Christmas sales are still slow. Loan activity is mixed at area banks, but deposit flows are healthy. Most Third District business contacts are projecting some improvement in economic conditions over the next six months. Manufacturing executives are looking for increased activity by June but remain cautious nonetheless. Department store sales are expected to show modest gains, although the 1982 holiday season will be below average. Bankers are forecasting some gains for commercial and consumer lending in the first half of 1982.
Manufacturing
Third District manufacturing activity has resumed its downward slide
in December, according to respondents to the most recent Business
Outlook Survey. Specifically, shipments are down at over one-third
of area plants and new orders fared only slightly better. Although
there has been further tightening of industrial stock levels
recently, there are some signs that inventory run-down has abated
somewhat. Setbacks for labor, on the other hand, continue with no
apparent moderation. Reports of reduced payrolls and shortened
working hours are as prevalent now as they were in November.
Survey participants remain optimistic in their projections of industrial recovery over the next six months. Local manufacturers' outlooks have, in fact, brightened a little in December, in spite of the continuing slump. Respondents are expecting a strong push in new orders that will rebuild backlogs and allow employers to expand both payrolls and the average workweek by June. Fractional additions to inventories are forecast, as well. There are few plans for increases in plant and equipment expenditures, however.
Industrial prices also show further softening in December. Prices of finished goods have been cut again and input costs have not changed from their November levels. Prices are expected to start climbing again between now and June, coincident with the projected rebound in activity.
Retail
December sales at Third District department stores are building
slowly as the holiday buying season ends its second week, but area
sales volume is still fairly soft overall, according to retail
contacts. Current dollar sales are ranging only 3 percent to 4
percent ahead of last year; real gains are slim at best. Sales of
Christmas related items, while pretty much in line with merchants'
expectations, are considerably below past holiday experiences. Ten
days of unseasonably warm weather following Thanksgiving put a
damper on holiday shopping spirit and thus kept the lid on spending.
In addition, local store officials say the Philadelphia retail
market has become exceptionally tough over the last two years as
economic conditions deteriorated. Seasonal sales are heavily
dependent on promotions and price discounting, often at the expense
of full price sales. As a result, merchants are starting their big
holiday pushes earlier and more forcefully. Recently, one local
retailer extended an 18-hour "one-day-only" sale to three days in an
effort to encourage spending.
Retailers predict that sales growth will remain slow but steady throughout the holiday season. Contacts believe that shoppers are watching their dollars closely though, and that the usual late season surge may be relatively minor. An extra shopping day on the retail calendar this year will help a little, but sales gains for the season and the year as a whole should remain in the 3 percent to 4 percent range. Projections for 1983 show more of the same for retail sales. Next June's current dollar sales volume will be 4 percent to 6 percent ahead on a year-over-year basis, according to merchants' forecasts.
The pickup in sales, though small, has helped bring inventories more in line. Stock levels are lean but generally in "good shape" and comparable to levels of a year ago. Industry representatives say they will keep stocks in check until the sales outlook improves.
Finance
Third District banking contacts report mixed loan activity in
December. Commercial loan demand, as expected, has softened even
more since the last Redbook. Chiefly responsible is the move toward
the corporate bond market. Distress borrowing has faded somewhat, as
well. As a result, overall C&I loan volume is now running only
barely above last December. On the other hand, lower interest rates
have made retail loans more attractive. Activity in consumer loans
has increased since November, but, for the most part, volume still
trails year-ago levels. One contact noted that some consumer loan
dollars were being diverted away from automobile loans to new
leasing arrangements because customers have been unwilling to make
large auto downpayments.
Forecasts of loan activity over the next six months are mixed but point to some improvement. Bankers agree that further retail loan growth is likely, especially if rates drop further. Projections for commercial lending range from flat activity, if economic recovery stalls, to a modest upswing if business conditions improve.
Third District bankers are quoting a prime rate of 11.50 percent, down from 12 percent a month ago. The slide in the prime has slowed recently and caused many local seers to revise their outlooks for interest rates. A trough for the prime of around 11 percent is forecast for early 1983 and any movement in the next six months is likely to be "slow and modest."
Deposit flows are very strong again this month. Demand deposits have improved since November and are now running 3 percent to 4 percent ahead of a year ago. Time deposits gained strength as well, with unexpectedly robust growth in the 7 to 31-day time deposits leading the way. One reason cited for this burst of activity is that dollars intended for the new money market deposit accounts are being held in the 7 to 31-day accounts temporarily, until MMDAs are offered on December 14th. Bankers have high hopes for the MMDA, and expect to attract a significant amount of deposits away from the money market funds.