Beige Book Report: Philadelphia
February 2, 1983
Reports from the Third District reveal an overall improvement in local economic conditions in January. Area manufacturing has posted minor gains this month while industrial prices remained stable. Retail sales are doing well, encouraged by favorable weather conditions and successful promotions. In the financial sector, both business and consumer loans are up. Mortgage rates have dropped further, bringing new life to the real estate market.
Third District contacts foresee a slow but sustained recovery for area business. Upswings in both manufacturing activity and department store sales are projected by industry spokesmen, but a hint of caution is evident in their plans. Bankers are expecting further growth in retail loan demand but predict that commercial lending will flatten out by midsummer.
Real Estate and Construction
The turnaround in the Third District housing market has continued
over the past two months. With conventional mortgage rates declining
to a range of 12.50 to 13.50 percent, sales have firmed up
considerably. Following an "almost normal" December, volume in
January is up between 20 to 50 percent on a year-to-year basis. Most
activity is still in the pre-owned home market. As a result, housing
starts remain stalled and new home prices continue to drop. Brokers
indicate, however, that a dip in rates below 12 percent this spring
would give sales of new houses a shot in the arm.
Manufacturing
Third District manufacturing activity is showing marginal
improvement in January, according to the most recent Business
Outlook Survey. New orders posted their biggest gains since last
March, and shipments registered a smaller but significant increase.
On the negative side, local factory employment plunged further this
month, according to the survey, and the average workweek was pared
again.
Looking ahead, respondents' prognoses for the economy remain bullish. Nearly 9 out of 10 of the executives polled in January are forecasting a business pickup within six months. New orders and shipments are expected to show major improvement by midsummer, along with factory payrolls and working hours. Light growth in inventories is still planned, but only marginal capital spending increases are likely.
The slowdown in inflation, evident for most of last year, has carried over into 1983. Survey results indicate that industrial prices in January are unchanged from December levels. Moreover, inflation is expected to remain at reduced levels for at least the next six months. Only half of this month's respondents, the lowest portion in seven years, anticipate higher prices by July for either raw materials or finished goods.
Retail
Department store sales in the Third District have gotten off to a
flying start in 1983. Year-to-year sales gains of 15 to 18 percent
are reported. Retailers attribute much of the current strength to
unusually cooperative weather and across-the-board promotional
activity. Moreover, current sales are being compared to depressed
levels last January. Nevertheless, sales are much better than
merchants had anticipated.
Retail contacts have become slightly more optimistic about future activity. Sales are projected to maintain their brisk pace into midsummer as consumer sentiment improves. By July, volume should be 5 to 6 percent over the previous year, resulting in some real dollar gains if inflation stays low.
Retail inventories have been trimmed again in January. Stock levels are now well below those of last year and are in better shape than many merchants had expected. Retailers are still planning "conservatively," though, expecting to keep inventories tight over the next six months.
Finance
Third District lending activity has improved modestly since the last
Redbook. Commercial loans, edging upward since December, are ahead
of year-earlier levels by about 8 percent, and are pretty much in
tune with bankers expectations. On the consumer side, retail loans
have grown slightly again this month. Lower interest rates and a
greater willingness on the part of bankers to lend, have helped
boost consumer loan volume. Area lenders foresee loan activity
turning mixed in the near future. Projections of a slow recovery,
increased long-term borrowing by corporations, and minimal retail
and industrial stock levels point to flat activity for commercial
loans over the next six months. Even with such sluggish improvements
in economic conditions, however, consumers' attitudes are expected
to improve, encouraging further retail loan growth.
The prime rate charged by banks in the Third District has been cut to 11.00 percent since the last Redbook. Although they expect the prime to be cut another 50 basis points by the end of the second quarter, banking contacts say the decline in interest rates is slowing because credit markets are reacting to uncertainties about the direction of Fed policy.
Deposit flows in the Third District have been significantly affected by the introduction of the Money Market Deposit Account. Heavy volume in the new account, termed a "bonanza" by one local banker, has pushed time deposit levels up as much as 30 percent over a year ago. Representatives from several large commercial banks report that 25 percent to 35 percent of MMDA deposits is new money, attracted from Money Market Funds and some of the smaller thrift institutions in the District.