Beige Book Report: Philadelphia
September 16, 1985
Economic conditions in the Third District in early September are virtually the same as they were in August. Manufacturing activity has leveled off again after slight improvement in July and August, and loan growth at commercial banks has slowed substantially. Performing somewhat better are the retail and housing sectors. Department store sales have been increasing moderately but steadily since June and automobile sales have risen in recent weeks. Mortgage lending continues at a rapid pace, reflecting an increase in real estate sales that was sparked by the drop in interest rates in the spring.
The Third District business community is generally optimistic for the near term, despite the lack of clear signs of future growth. Although manufacturers have cut back planned capital expenditures, they generally expect stable or improving conditions over the next six months. Retailers have raised their estimate of third quarter sales and, though uncertain about the year-end shopping season, see no signs of trouble at present. Bankers expect more growth in commercial lending as the year comes to a close, and see the pickup continuing through 1986. Mortgage lending is expected to remain strong at current interest rate levels, although the growth of consumer lending may slow until consumer balance sheets improve.
Manufacturing
The level of industrial activity in the Third District in September
is unchanged from August, according to the most recent Business
Outlook Survey. More than half of the local manufacturers replying
to the September survey say business is steady, and the number of
firms reporting healthier business is offset by an equal number
experiencing decreases for the month. Conditions are relatively
better for the food products and metal industries and for
manufacturers of stone, clay, and glass products; optical equipment,
machinery, and apparel manufacturers generally report relatively
less favorable conditions.
Third District manufacturers have positive views on the near future. Forty-two percent of the September survey respondents expect improving business conditions over the next six months, while only 13 percent say deterioration is likely. New orders and shipments are expected to rise, but no increases in capital expenditures are planned, and the outlook for greater employment among area manufacturers remains poor. In their overall estimation at business conditions during the next six months, manufacturers of paper, rubber, and plastic products are relatively more optimistic, while food and apparel companies generally do not foresee much improvement.
Retail
Retail trade in the Third District has improved since early summer.
August sales for all product lines were better than area store
managers had expected, and indications are that September will he a
solid month too. Thus, the improvement that began in July, after a
flat June, should result in third quarter sales 6-8 percent above
the same period in 1984 for major Third District retailers. While
store officials are reluctant to forecast the late fail and
Christmas shopping seasons at this time, they say they are not
arbitrarily restricting inventory levels of fall and winter items.
Manufacturer-sponsored low interest rate programs have boosted automobile sales in the Third District. One area dealer says many people are trading in cars still being paid for in order to take advantage of lower rates, and says some prospective used car buyers are switching to 1985 models covered by the incentive financing. However, inventories are heavier than usual at most dealers, and some are concerned that sales will fall sharply when special financing is discontinued in October and higher-priced 1986 cars arrive.
Finance
Total loan volume at major Third District banks in September is
substantially the same as it was in August. While up approximately
15 percent from a year ago, outstanding volume for all loan
categories combined has not changed over the last month. Consumer
loan volume in early September is approximately 18 percent above the
level of September 1984, but growth from August has slowed to a 3
percent annual rate, the lowest month-to-month increase so far this
year. Area bankers say consumers may be approaching the maximum
amount of debt they wish to take on and may even begin to reduce
borrowings in order to keep debt-income ratios at manageable levels.
Commercial and industrial loan volume at large banks in the Third District ranged from flat to slightly off between August and September. A reduction in asset-based lending and a loss of borrowers through mergers and acquisitions are given as reasons for the recent decline in outstanding loans at some banks. Nevertheless, business loan volume in September is up approximately 17 percent from a year ago, and bank lending officers expect growth to resume towards the end of the year and continue through 1986.
Mortgage lending remains strong. The current interest rate on conventional, 30-year mortgages is 12 percent, the same as in June. Mortgage lenders say the demand for fixed-rate mortgages at this rate shows no signs of abating.
Local bank economists still predict higher interest rates, but have lowered their forecasts. They now see short-term rates rising 25 to 50 basis points over the next 12 months, instead of the 100 basis point rise that was the average forecast last month.