Beige Book Report: Philadelphia
May 18, 1983
Indications from the Third District in May are that business activity is generally on the upswing. Local manufacturers report substantial improvement in business conditions since March. Retailers say sales at area stores are growing steadily. Loan activity has turned mixed recently; retail lending has gained ground but commercial loans have slipped slightly. In the construction industry, overall activity is healthy.
Third District contacts foresee these trends continuing for the next six months. Gains in industrial activity and retail sales are expected to continue at a brisk pace into the fall. In the banking sector, declining interest rates should reinforce current diverging lending trends. Strong demand for housing will bolster residential construction, according to builders, but commercial demand looks weak.
Real estate and construction
Representatives of the Third District construction industry indicate that
construction activity is in good shape in May. Real estate brokers report a steady
increase in sales at current mortgage rates, with more sales spilling over from pre-owned
homes into the market for new units. As a result, residential construction is showing the
first real signs of strength in over two-and-a-half years. Builders say demand is
sufficient to sustain, if not boost, the current pace of residential activity, but expansion
at the present rate will press on already tight supplies of building materials. Commercial
construction business has also improved recently, despite relatively high vacancy rates.
Commercial developers, however, say demand for office space is very weak and expect
office-building to wind down considerably.
Manufacturing
Respondents to the Business Outlook Survey indicate that industrial activity
in the Third District continues to pick 15) steam. The gains reported in April and May are
on a par with the vigorous growth recorded earlier this year, providing further evidence
that a sustained recovery is underway. Specific indications of the pick-up include
booming new orders and shipments. Producer backlogs have also increased for the first
time since mid-1979, and delivery times are getting longer. Inventory liquidation
continues, but some employers have begun adding to payrolls and extending working hours
as activity levels have climbed.
Survey respondents are very confident that industrial rebuilding will continue and are projecting more gains for the next six months. Expanding new orders and shipments are forecast by four out of five respondents to the May survey, and businessmen are planning to hire additional workers and to lengthen the average workweek by late fall. In addition, modest growth in stock levels is foreseen, and increased outlays for capital equipment are in the works.
Increased activity is pushing industrial prices up slightly in May, according to survey results. Input costs have risen at just over one-quarter of area plants, and a few reports, of price hikes fear finished products have surfaced this month, too. Respondents foresee further escalation in raw material prices by November and, to a lesser extent, are planning to boost their own prices over that time, as well.
Retail
Sales at Third District department stores have climbed steadily through April
and into May. Dollar volume is right where retail executives expected it to be, about 5
percent to 6 percent ahead of a year ago. Merchants say an improving economic climate
has buoyed consumers' confidence and, as big tax refunds keep rolling in, customers are
parting with mors dollars. In addition, this spring's excellent weather is credited with
taking the edge off the usual post-Easter sales slump. Activity remains good across the
board including some new movement in durables, especially household furnishings, which
are benefiting from the housing pick-up.
Retailers predict that sales will continue to grow over the next six months. Declining unemployment rates and an expanding economy are expected to provide an increasingly strong stimulus to sales. Larger tax refunds will still be a factor, according to contacts, and the mid-summer tax cut also should give retail business, particularly durable goods, a boost. Merchants are projecting that, by November, sales activity will be 6 percent to 8 percent ahead of the year before.
Stock levels are about even with those of a year ago, and retailers report a little easing in their tight grip on inventories as sales have improved. Inventories remain very lean, nonetheless, and there are no plans at the present time for further rebuilding.
Financial
Loan activity at Third District banks has turned mixed since the last
Redbook. C& I loan volume, as expected, has dropped slightly since March, owing to
weaker commercial loan demand and cutbacks in below-prime lending, according to
contacts. Reports of commercial loan volume now range fom 6 percent below a year ago
to 4 percent above a year ago. Retail loan activity, on the other hand, is building
slowly. Although interest rates are still high enough to keep a somewhat tight lid on
demand, consumers' attitudes toward credit have improved this spring, according to
bankers. In the wake of a push by lenders, consumer loan volume has risen by 5 percent
to 10 percent from a year ago. Area banking contacts say these trends in borrowing are
likely to continue into the fourth quarter. Lenders expect that demand for commercial
loans will be soft for the next few months. The shift to the bond market is likely to be
enhanced by further declines in interest rates, and a "hesitating" economic recovery
should keep capital investment plans flat until fall. Lower rates, however, are likely to
bolster retail lending activity, especially if economic indicators continue to point to
strength.
The prime rate has held steady at 10.50 percent at major banks in the Third District. Pressures are building, according to bankers, that should push rates down between 50 and 100 basis points by the middle of the third quarter. These pressures include good inflation news and weak demand for commercial credit. By fall, however, much of the downward pressure should begin to disappear as more consistent economic growth awakens business loan demand.
Deposit flows are still very strong in May, although activity has settled down recently. Demand deposits are a healthy 4 percent to 6 percent ahead on a year-overyear basis, down slightly from March levels. Bankers attribute that slide to April seasonal problems and a surge of IRA activity at tax time. Time deposit growth has slowed as well, indicating that the shift to MMDA s may be nearing completion. In fact, some outflows from MMDA s have been reported. Nevertheless, time deposits remain far ahead of year-ago levels.