October 23, 1985
Economic conditions in the Third District in early October are substantially the same as they were in September. The pace of manufacturing activity has not changed significantly since late summer and loan growth at commercial banks has been nearly flat. The housing and retail sectors remain buoyant although a major newspaper strike in Philadelphia may restrain retail sales in the city and its suburbs this month.
The prevailing outlook among businesses in the Third District is positive. Manufacturers foresee improving business conditions and bankers expect increased commercial borrowing in the fourth quarter; some report a pickup in loan approvals already. Retailers are generally pleased with recent sales experience although some are becoming apprehensive about the effect on future sales of growing consumer debt.
Manufacturing
The pace of industrial activity in the Third District in October is
about the same as it was in September, according to the latest
Business Outlook Survey. This marks the seventh time in the last 10
months that the majority of firms responding to the survey have
reported no change in the rate of their production. Conditions
appear to be about the same for both durable and nondurable goods
producers.
With respect to particular measures of current manufacturing activity, survey respondents indicate fractional increases in new orders and shipments but slight declines in unfilled orders and employment. Industrial prices in the District are stable; the majority of survey respondents report no changes in the prices of either raw materials or the products they manufacture.
In general, Third District manufacturers remain optimistic in their outlook for the next six months. Forty-three percent of the October survey respondents expect business conditions to improve over the next two quarters while only 22 percent anticipate a worsening climate. Expectations vary across industries, however. Durable goods manufacturers do not foresee as much improvement as do makers of nondurables. For the manufacturing sector as a whole in the Third District, participants in the October survey forecast moderate gains in new orders and shipments, and a slight increase in capital spending; but they anticipate a marginal decline in payrolls.
Retail
The improvement in retail trade in the Third District that began in
the late summer appears to be continuing in early October. Store
officials are sticking with their earlier prediction of a year-over-
year increase of approximately 8 percent in third-quarter sales. The
back-to-school selling season was generally in accordance with
expectations and all lines of merchandise shared in healthy sales
during September and early October. Looking ahead, retailers cite
the growing burden of consumer debt and a shorter holiday shopping
season this year as factors that might limit fourth-quarter sales,
although they expect total sales for 1985 to top 1984 levels by as
much as 10 percent.
A matter of concern to Philadelphia area retailers is a strike which has kept the city's two largest newspapers out of circulation since September 7. Although it is too early to quantify the impact of the strike on the retail sector, Chamber of Commerce representatives say that many specialty and department stores in the newspapers' circulation areas are experiencing lagging business which they attribute to the loss of these major advertising mediums.
Finance
Total loan volume at major Third District banks in late September is
virtually unchanged from its level in August. Commercial and
industrial loan amounts outstanding in September, while 18 percent
above a year ago, are substantially the same as in August. However,
some bank commercial lending officers say that the number of loans
approved in recent weeks has increased and a rise in outstandings
will follow.
Consumer loan volume in late September is also 18 percent above its level in September 1984 but has fallen slightly from August. Some Third District bankers say that demand for consumer credit at banks may have slackened in recent weeks because consumers are now becoming reluctant to increase their installment debt burden substantially. Moreover, those households that are borrowing to finance automobile purchases are taking advantage of the incentive financing offered by the manufacturers.
Real estate lending by commercial banks is increasing after a summer lull, outstanding loans are now rising toward their September 1984 levels. Mortgage lenders report continued strong demand for fixed- rate mortgages at the current interest rate of 12 percent.
Local bank economists expect economic growth to accelerate in the fourth quarter, bringing greater demand for credit, especially from the commercial and industrial sectors. Predicting a less accommodating stance from the Fed, they have raised their interest rate forecasts. The prevailing view is that the federal funds rate will be near 9 percent and long-term Treasury bonds over 11.5 percent by year-end.
Demand deposits at major Third District banks are up approximately 13 percent from a year ago, little changed from the year-over-year increase experienced since June. Nontransactions deposits exhibit a similar pattern. Bank asset/liability managers in the District say that they have been able to meet targeted levels of time deposits in recent weeks without aggressive pricing.