Beige Book Report: Philadelphia
August 6, 1985
Economic conditions in the Third District appear to have improved slightly in July. Manufacturing activity has picked up marginally after a flat three months and retail sales have rebounded from an unexpected dip in June. Both commercial and consumer loan volume continue to grow at area banks, although somewhat more slowly than in the first half. Early indications are that tourism business in the Third District this summer is better than it was in the disappointing 1984 season.
The outlook for the Third District economy is positive. Manufacturers generally expect business conditions to remain stable or to improve over the next six months and anticipate increased capital spending. Area retailers are pleased with the recently regained strength of sales and expect a good third quarter. Bankers predict renewed economic growth and foresee demand for commercial credit increasing near the end of the year.
Manufacturing
Manufacturing activity in the Third District is moving up marginally
alter a 3-month lull, according to the July Business Outlook Survey.
Twenty-eight percent of the local companies answering this month's
survey report a pickup in business since June, versus 18 percent
reporting a slowdown. Slightly less than half indicate no change.
The rate of both new orders and shipments in July increased
fractionally over June and inventories continued to be worked down.
Negative indicators in July were manufacturers' backlogs of unfilled
orders and employment, both of which edged lower.
In their outlook for the next six months, most area manufacturers are optimistic. Over 85 percent of the July survey respondents believe business conditions during the next six months will be the same or better than they are now, and more than 40 percent forecast gains in both new orders and shipments. Prospects for greater capital expenditures have improved slightly. Twenty-?? percent of the companies contacted in July plan increased outlays for plant and equipment over the next six months, up from 20 percent in June. The employment situation is not likely to improve, however; more than half of the industrial establishments surveyed this month plan no changes in either employment levels or working hours, and more than one-fourth expect to make workforce reductions between now and January 1986.
Retail
Retail trade in July appears to be picking up a bit after a
lackluster June. Major department stores in the Third District had
flat or slightly lower sales in June, on both a month-to-month and
year-to-year basis; but increased sales in July should put them back
on the path to 1985 sales at least 5 percent above 1984. Apparel and
seasonal items remain popular with shoppers while sales of hard
goods lag. Exceptions are electronic equipment, which has been
strongly promoted by some stores, and air conditioners.
Retailers are optimistic about the third quarter, anticipating an increase in sales of approximately 6 percent over the same period last year on a same-store basis. New stores opened in the Third District by major chains in recent months are doing well, and, despite a slower than expected spring, inventories have been kept under control.
Finance
Loan volume continues to grow at Third District banks, but the pace
is moderating. Consumer loan volume is increasing at an annual rate
of approximately 15 percent in July, substantially slower than the
25 percent year-to-year increase reported last month by major banks
in the Third District. Tighter credit qualifications and stepped-up
collection efforts in response to a rising delinquency rate are
mentioned as factors in the slackening pace of consumer loan growth.
Commercial and industrial loan volume in July is approximately 14
percent higher than it was in July 1984, a slight easing from the
June year-to-year increase of 17 percent. According to local
bankers, business borrowing has been limited by retrenchment in
long-term foreign lending and by large corporations' reliance on
bond and money markets.
Third District bankers expect loan growth in most categories to continue at the present pace for the next several months, then pick up at the end of the year. Some believe that commercial lending, especially to middle market companies, may move up sharply as economic growth accelerates into 1986. Agreeing with this outlook, local bank economists expect credit conditions to become tighter near the end of the year. They say that interest rates may be driven up by federal government borrowing requirements and increased private sector credit demand, coupled with greater restraint by the Fed. They place the prime rate at 10 percent or more by year-end, the federal funds rate near 9 percent, and long-term Treasury bond rates at 11 percent.
Tourism
Tourist-related business has improved over last year at mountain and
seashore resorts in the Third District, although the vacation home
rental market is soft in some locations. Chamber of Commerce and
local government officials report more visitors to recreational
attractions this year. They attribute the increase primarily to
better weather than in the 1984 season, but also cite improved
economic conditions and greater promotional efforts. Delaware
officials say the Memorial Day weekend broke records for attendance
at the beaches. By mid-July, tourism-related revenues at
Pennsylvania mountain resorts were estimated to be 4 percent above
1984. In New Jersey, tourism revenues are up about 10 percent from
1984, although shorter vacation stays and an increased supply of
summer homes have resulted in lower rental income this year at some
of the state's resort communities.