‹ Back to Archive Search

Beige Book Report: Philadelphia

May 8, 1984

Most Third District contacts report steady growth in the local economy during the past six weeks. The one exception is the real estate and home construction industry, which has experienced a recent slowdown in activity. In other industries, manufacturers report solid increases in activity since early March and, after an anticipated let up in March, retailers are enjoying handsome sales gains in April. Additionally, local bankers report very steady growth in both commercial and retail loan volume.

The outlook varies across industries. Manufacturers and retailers forecast continued growth, but at a slightly slower pace than during the recent quarter. Area bankers are confident that they will continue to see healthy loan growth during the next six months. On the other hand, real estate and construction executives express the concern that if mortgage rates continue to rise, their industry will experience a significant and sustained slump in activity.

Manufacturing
The Third District manufacturers responding to the most recent Business Outlook Survey report solid increases in activity during the past two months. Over 50 percent of the respondents indicate a pickup in activity, while only five percent report a decline. New orders and shipments continue to make significant, steady advances, and unfilled orders and delivery times are also up. Contrary to national figures, survey results indicate that local manufacturing inventories have been unchanged for the past six months. Also. April employment has made only slight gains over March levels.

The effect of the economic expansion s being felt in industrial prices at area firms according to the survey. In April, 51 percent of the respondents report paying higher prices for raw materials and 23 percent indicate that they are being paid more for their output. Looking ahead, the April price outlook marks the 12th consecutive month in which more than three-quarters of the respondents have forecast higher input prices. This month, 80 percent of those polled predict increased input costs by October, and 54 percent anticipate receiving higher prices for their final products.

The overall outlook for manufacturing during the next six months is positive, though to a slightly lesser degree than in past months. Two-thirds of the executives surveyed foresee continued expansion in manufacturing activity until at least October. Additionally, a large portion of respondents (47 percent) once again forecast a pick up in capital expenditures over the next two quarters.

Retail
Following an anticipated mediocre performance in March, retail sales in the Third District have been very healthy in April. Retailers report sales increases of 25 percent to 35 percent over April '83; they attribute about half of that gain to the late Easter holiday. Despite the reported declines in national retail sales for the months of February and March, contacts here have not sensed a reduction in either consumer confidence or willingness to spend. In fact, credit sales as a percent of total sales continue to rise. Inventories at local department stores are reported to be slightly on the heavy side, but retailers say they have no plans as yet to undertake markdowns. Merchants report that they promoted heavily during the Easter selling season, but that current promotions are normal for this time of year.

Looking ahead, retailers foresee some easing in sales growth, but still forecast 5-15 percent increases over a year ago through September.

Financial
Bank contacts in the Third District report healthy growth in both commercial and retail loans since early March. C&I loan activity is maintaining the 10 percent to 15 percent rate of increase over 1983 levels which began in February. Contacts report that both large and small companies are borrowing money for capital expenditures, inventory financing, and working capital. Retail loan volume also has posted healthy advances during the past six weeks, and consumer loans outstanding now exceed last year's levels by 10 to 20 percent. Loan officers remark that the growth is attributable to automobile loans and credit card borrowing.

While most bankers foresee continued strength in loan growth for the remainder of 1984, some have cautioned that higher interest rates could discourage borrowing later in the year. On the retail side, local contacts unanimously forecast generally robust activity for at least the next two quarters.

The prime rate at Philadelphia banks is currently 12 percent, up from 11 percent six weeks ago. Bank economists are forecasting gradual upward movement in both short-term and long-term rates through the end of this year. They predict that continued GNP growth in the second quarter (3 percent to 4 percent), an increasing rate of inflation (5 percent to 7 percent), government borrowing demands, and a firm Fed policy will push rates gradually higher. Some local economists feel, however, that the FOMC will attempt to keep the federal funds rate at or below the 11 percent level for the remainder of this year. They believe that if second quarter growth appears to be within the 3-4 percent range and there are no unexpected jumps in the monetary aggregates in the near future, the Fed will be able to achieve that goal.

Real Estate/Construction
Third District realtors and residential builders have begun to feel some effects of rising mortgage interest rates, which have climbed by 50 to 125 basis points over the last two months. Local rates for 30-year, 3-point fixed-rate conventional mortgages currently range from 13-1/2 to 14 percent. Although real estate sales firms report that sales have remained strong through early April, (15 to 20 percent higher than those of a year ago) some are now seeing a slowdown in activity. Local builders, however, report a more dramatic drop in sales over the last several weeks, which they say are now running 30 to 40 percent behind last April's strong pace. Both realtors and builders attribute the recent easing of activity exclusively to buyer nervousness over rising mortgage interest rates.

New housing starts also have slowed considerably as local builders express caution over the dangers of speculative construction during a period of rising interest rates. Builders also are concerned about the possible increase in the rate of buyer cancellations of contracts on houses already under construction. As a result, inventories of uncommitted homes are very slim. As for the future, industry contacts feel that if mortgage rates reach the "magic" level, somewhere between 14 percent and 15 percent, the industry will enter a sustained slump.