December 6, 1983
Third District contacts report that the regional economy has posted mixed gains in November. Local manufacturing continues to expand despite some downward seasonal pressure, and retailers report yet another strong month in November. The financial picture has been mixed; commercial loan demand remains disappointingly weak, while retail lending continues to make significant advances. in housing, contacts report that continued high mortgage rates are resulting in a dip in November sales.
The outlook for the Third District economy is for continued expansion into the Spring. Manufacturers expect to make significant capital investments and retailers anticipate very strong sales over the next six months. Bankers are forecasting a long awaited pickup in C&I loan activity.
Real Estate and Construction
Third District housing activity, except for that in downtown
Philadelphia, has decreased slightly in November from October
levels. Although business remains ahead off the depressed levels of
a year ago, most contacts report spotty or declining sales over the
last six weeks. The most often cited explanation for recent poor
sales performance is that higher mortgage interest rates, and
uncertainty over future rates, are keeping all but the most
pressured buyers out of the market. New starts are also very slow
this month, owing to both declining sales and seasonal conditions.
Manufacturing
Although seasonal factors had a damping effect on area industry this
month, responses to the most recent Business Outlook Survey still
indicate that local factories continued to post gains. About 40
percent of the executives surveyed report improved conditions in
November while only 6 percent indicate a decline. New orders and
shipments have shown widespread growth, and unfilled orders and
delivery times have advanced slightly as well. Inventories, led by a
significant buildup in durables, appear to have leveled off from a
two-year decline. Employment also has also improved in November, and
both payrolls and the length of the average workweek have been
increased.
Despite the continued strength of the expansion, respondents have tempered their outlooks somewhat this month. While 62 percent of the executives polled predict that the recovery will continue into next Spring, November's survey records the smallest group of optimists so far this year. Nevertheless, solid increases are still anticipated in both new orders and shipments, and manufacturers expect to hire more workers and to expand working hours between now and April. Additionally, the percentage of respondents planning to increase plant and equipment expenditures over the next six months is the highest it has been in two years. In short, the outlook is for continued growth.
Industrial prices have climbed again this month. Input price increases have been significant in November, but slightly less so than in October, reflecting the mild seasonal easing of producer activity. Prices received for finished goods, on the other hand, have posted more widespread gains this month than last. Looking ahead, 70 percent of the manufacturers surveyed predict higher materials costs in the next six months, while 60 percent expect to receive higher prices for finished goods over the same period.
Retail
Retail sales in the Third District have shown steady improvement
over the last six weeks. As contacts had anticipated, year-over-year
gains are running about 10 percent in November, and they are
expected to maintain that pace throughout the holiday shopping
season. "Black Friday" was an exceptionally good day, despite an
early snow, with some stores showing increases of 20 percent from a
year ago. Higher consumer confidence levels and higher real incomes
prompted an early opening of the Christmas shopping season this
year, according to contacts, which could well turn out to be the
best season since 1978. Retailers report their heaviest sales to be
in personal computers and related equipment, entertainment
electronics, and home furnishings. Due to a significantly reduced
need for promotional activity, profit margins in area stores have
risen from October levels.
Merchants remain confident about sales over the next six months and currently are forecasting increases of 8 percent to 9 percent over strong Spring 1983 figures. Accordingly, retailers plan to allow their inventory levels to remain well above those of a year ago. Stores have built up stock over the last six weeks in preparation for the holiday surge, and contacts say inventories will remain 2 percent to 10 percent higher than a year earlier into the Spring.
Financial
Area banks continue to report mixed loan activity in November.
Commercial loan volume has risen only slightly in the last six
weeks, far below the anticipated level. Once again, many bankers
feel that the improved internal cash flow of area companies is
weakening loan demand. Reports on year-over-year loan volume vary
from 12 percent below to 20 percent above November '82 levels.
Although banks are struggling with C&I loans, they are enjoying
consistently steady growth in retail lending. Led by the aggressive
marketing of credit cards, consumer loan volume currently stands
between 5 percent and 13 percent above levels of a year ago.
Third District bankers are optimistic about loan demand for the next six months. They believe that companies will soon exhaust their internal funds and turn to borrowing to support investment in inventories, plant, and equipment. Consumer lending is also expected to be very active through Spring, and bankers plan to continue heavy promotion of retail, loans and credit card accounts.
The prime lending rate remains at 11 percent at major banks in the Third District, reflecting what bankers feel is an "air of economic stability." Consequently, contacts foresee little change in interest rates between now and the second quarter of 1984. Some bankers expect short-term rates to ease slightly over the next two or three months, and then to rise again after the first quarter as overall borrowing continues to increase.
Deposit flows in the Third District are reported to be rather sluggish in November. Demand deposits, although fairly volatile in recent weeks, show little net change from October. November's levels range from 2 percent below to 10 percent above those of a year ago. Time deposit growth is flat this month, according to area bankers, but levels remain about 30 percent ahead of November '82.