Beige Book Report: Philadelphia
August 10, 1983
Indications from the Third District in August are that business activity, though still spotty, continues to improve. Local manufacturing has posted major gains again, and retail sales have been excellent. Loan activity at area banks, however, has turned mixed, and mortgage rates have risen since June, causing a slowdown in real estate sales activity. Resort businessmen report booming activity at most area vacation spots, but agriculture officials say regional crop yields are down.
Most Third District businessmen are looking for further improvement over the next six months. Industrial expansion is expected to remain at healthy levels into 1984, department store operators say sales should maintain their robust upswing, and banking contacts project increases in both commercial and retail lending by February.
Agriculture
Third District agriculture officials indicate that poor weather
conditions have reduced many area crop yields, some to unprofitable
levels. This has been a disastrous year for grain in New Jersey and
Pennsylvania because the cold, wet spring delayed planting and hot
and dry weather now is hampering growth. Grain production levels are
estimated at only 71 percent to 83 percent of 1982 yields, and
prices are not expected to rise enough to offset these losses in
volume. Pennsylvania alfalfa hay growers plan four or five cuttings
this year, but the yield on the third cutting, underway now, is well
below a normal year's, due to low rainfall in recent months.
Area vegetable farmers say the hot temperatures have also been harsh on their crops. The tomato crop will be about 91 percent of last year's production, and potatoes, soybeans, and peppers are all running below 1982 levels. Vegetable prices are strong, though, and growers are projecting a pretty good year profit-wise. Many of the summer's fruit crops, especially apples and blueberries, have also been sub-par.
Some crops are doing well this year despite the weather. Peach growers are expecting a bumper crop, with yields as high as 38 percent over last year's levels. The Delaware corn crop, although a little bit late, also looks good. Delaware poultry farmers are also turning a sound profit for the first time in quite awhile.
Real Estate And Construction
Activity in the Third District housing market has dropped off
somewhat since June, but sales are still 30 percent to 100 percent
higher than a year ago. Mortgage rates have risen as much as 100
basis points in the last six weeks and that, contacts say, has been
enough to dampen demand slightly. With the recent rise in the FHA
mortgage rate expected to push conventional rates even higher,
realtors' outlook for housing demand are not as good as in recent
months. Also, new construction has been heavy, and the inventory of
unsold new units, which is about as high as that of a year ago, now
presents a serious problem to builders if demand deteriorates much
more.
Manufacturing
Third District manufacturing has continued its rapid expansion
through July, according to the most recent Business Outlook Survey.
Survey results indicate that, after adjusting for seasonal
pressures, the overall growth from June to July is the most
substantial observed so far this year. New orders and shipments are
up over June levels, and, for the first time in two years, inventory
liquidation has slowed to marginal levels. Manufacturers, however,
report only slight expansion of either employee ranks or the average
workweek.
Looking ahead, the recovery in the industrial sector is expected to forge ahead over the next six months. Three-quarters of the manufacturers participating in the survey foresee better overall conditions by early next year; none predict any deterioration in activity over that time. New orders are projected to continue to outrun shipments, resulting in higher levels of unfilled orders, and manufacturing inventories are expected to grow. Survey respondents also say they will increase their capital spending by early 1984 and are likely to hire more employees and lengthen working hours as well.
Industrial prices have risen again. Reports of price hikes are slightly more prevalent than in June, as 30 percent of the respondents indicate that input costs are higher this month, and just under 20 percent say they have raised their own prices. Projections of further price inflation by next year are widespread.
Retail
Sales at Third District department stores are progressing smartly in
August, according to local store operators. Dollar volume is as good
as, if not better than, merchants had anticipated, notching solid
gains of between 8 percent and 12 percent on a year-over-year basis.
Retailers believe that consumer balance sheets have been in good
order lately and that shoppers are spending the money received as a
result of the July tax cut. Wealth gains from the stock market have
also had an influence on sales activity. Virtually all lines,
including durables, have been moving quickly this month, with men's
and children's clothing doing especially well.
With the best part of the sales year yet to come, area retailers are highly optimistic about the future. Merchants are projecting a banner holiday season and a solid start in 1984, but they say that gains on a year-over-year basis are likely to slip from this month's highs because sales in early 1983 were fairly strong. Store operators are planning conservatively, though, and they have brought inventories back in line with year-ago levels. Stocks will be kept lean, but not so tight that merchants risk losing sales if activity exceeds their projections.
Financial
Loan activity at major banks in the Third District is mixed in
August. Local bankers report that commercial lending has been
declining slightly over the last six weeks, somewhat out of tune
with lenders' projections. C&I loans, which contacts say currently
range from 15 percent below to 14 percent above last August's
figures, are exhibiting the "summer doldrums" at many banks and that
seasonal softness has caused further deterioration of already weak
business loan demand. Consumer loan activity, on the other hand, has
risen again this month, and volume remains ahead of a year ago.
Expanding credit demands and aggressive marketing by lenders have
given retail lending a strong boost despite some recent softening in
mortgage and automobile lending.
For the next six months, area bankers are forecasting modest gains in lending activity. Commercial loan demand is expected to firm up slowly as businesses begin to rebuild inventories and to expand capital expenditures. Consumer lending is also likely to show further improvement, but bankers expect that further weakening in the housing sector will continue to limit retail loan growth.
Most local bankers agree that we have now seen the trough of an interest rate cycle. Financial contacts foresee rates trending upward as commercial loan demand picks up and financing of the federal deficit expands. The rise, however, is likely to be slow and irregular with the prime, currently holding steady at 10.5 percent, creeping up about 100 basis points by the middle of the first quarter of 1984.
Deposit flows in the Third District continue to weaken this month. Demand deposits have declined again, and are now only about 3 percent ahead of a year ago. That change is partly seasonal. However. Time deposits, on the strength of the MMDA, are still far ahead on a year-over-year basis. Several contacts have noticed a drop-off in other time deposits, chiefly in 26-week and 30-month certificates, apparently reflecting depositors' anticipation of higher interest rates.
Tourist Services
Officials at vacation spots in the Third District report a
substantial resurgence of tourist activity this summer. Tourist
traffic and spending is ahead of last year's volume at most major
resorts in the tri-state area. Business at seashore resorts in
Delaware and southern New Jersey has been booming so far this
season. Contacts there attribute the strength to perfect beach
weather, an improved consumer outlook on the economy, and excellent
fishing. Attendance at area amusement parks has also been very heavy
because of the weather. Pennsylvania's mountain vacation spots are
the exception to the good news, though. Rain and bad weather washed
out several important early season weekends, and tourist traffic is
just beginning to gain on year-earlier levels. Pocono spokesmen say
the current pace of activity is good, but heavy competition from
Atlantic City and lingering unemployment in the nearby steel regions
of Pennsylvania have kept tourist business below expectations thus
far.
The outlook for the balance of the season, however, is equally bright across the district. Advance reservations have nearly filled available lodgings at the seashore for the rest of the summer, and incoming inquiries are 20 percent to 30 percent ahead of last season's pace in the Poconos. If the weather holds out, tourist business is expected to approach record levels by season's-end.