Beige Book Report: Philadelphia
October 23, 1984
Third District business contacts have given a mixed report on the economy in October. Manufacturers continue to see a deceleration in the growth of industrial activity and realtors indicate that sales are down about 15 percent compared to last year at this time. In contrast, retail sales remain very strong in the Third District and the financial sector is sailing along, but with some slight softness in the demand for commercial loans.
Looking ahead, a healthier business climate is anticipated in the manufacturing sector and realtors are looking for sales to pick up by about 5 percent by March. The growth rates of both consumer loans and retail sales may slow in early 1985 if interest rates rise, according to local business spokesmen.
Manufacturing
Third District manufacturers continue to see a slight deceleration
in growth, according to the October Business Outlook Survey. This
month, 35 percent of the manufacturers surveyed say industrial
activity continues to increase, while 13 percent report a decline. A
slight majority say there has been no change since September.
Specific indicators turned in a positive performance, although it was slightly less robust than last month. About half of the executives polled cited gains in new orders and shipments. Over two- thirds of the respondents, however, reported no change in producers' backlogs, delivery time, employee payrolls, and the length of the average workweek.
The six-month outlook for manufacturing is better this month than last. According to the survey, growth is expected to continue: 50 percent of the respondents anticipate a healthier business climate by March and only 13 percent expect worse conditions. Gains are expected in new orders, shipments, delivery times, employee payrolls, length of the average workweek, and capital expenditures.
Industrial prices for both raw materials and finished goods are relatively stable this month, as about three quarters of the executives polled report no change since September in either prices paid or prices received. The outlook, however, does show widespread expectations of price hikes within six months. Eighty-three percent of respondents anticipate higher costs by the end of the first quarter of less, while 54 percent foresee receiving more for the goods they sell.
Retail
Demand is still strong in the retail sector. After a little summer
sluggishness, area retailers are meeting or exceeding their sales
expectations, with gains of 10 to 20 percent over last year's
receipts. Third District merchants project a strong ending for 1984,
although sales may not match those of last year's exceptional
holiday season. Over the next six months, the rate of growth in
retail sales is expected to slow somewhat. Sales at the end of the
first quarter are likely to stand at about 8 percent over a year
earlier.
Inventories are up about 10 percent over last year and are heavier than usual, but are in line with sales expectations. The proportion of sales made on credit remains stable at about 60 percent at area department stores.
Finance
Loan demand In the Third District is softening slightly on the
commercial side. Bankers report a range of 0 to 2.5 percent growth
in C&I loans over the pest six weeks, with most of that growth
coming in the most recent 2 weeks. Bank executives anticipate a
pickup in commercial loan demand within the next six months in
conjunction with further maturation of the economic expansion.
In the consumer lending area, financial contacts report 4 to 10 percent growth over the past six weeks. On a year-over-year basis, consumer loans are still running about 20 percent ahead. One local bank reports an increase of 50 percent in retail loan volume over a year ago, principally due to intensified development of credit card operations. Area bankers look for continued growth in the consumer area but at a slower pace.
The prime lending rate dropped from 12.75 to 12.50 percent on October 17 at most large banks in the area. Third District bank economists predict another 25 basis point cut within the next few weeks. Their six-month projections, however, show a prime rate of about 15 percent as a result of increased credit demand.
Deposit growth, in general, has remained flat with the exception of savings certificates with a maturity of eighteen months or more. This may reflect consumers' expectations of further drops in interest rates and an attempt to lock in higher rates now.
Real Estate
Residential real estate sales have been flat over the past six weeks
and contacts say sales are down by about 15 percent compared to
year-ago levels. They attribute this almost entirely to high
mortgage interest rates. Thirty-year fixed-rate conventional
mortgages are available at 13.9 percent. Adjustable rate loam,
negotiable after one year with 20 percent down, stand at 11.5 to 12
percent. Inventories of unsold houses have been a little heavy
lately as a result of the mini-slump in sales and continued new
construction, mostly of townhouse and condominium complexes.
Realtors are optimistic for the future, however. Unit sales are
expected to grow by about 5 percent from their current levels by
March 1985.
Commercial real estate is reported to be experiencing a boomlet. Building permits are up and office occupancy rates are around 90 percent in both the city and suburbs.