Beige Book Report: Philadelphia
December 5, 1985
Economic conditions in the Third District in late October and early November appear to be improving. Manufacturing activity is turning up after several flat months and retailers report sales in line with optimistic expectations. Consumer and commercial lending is growing at a slightly faster pace now than earlier in the fall.
Expectations about Third District conditions are mixed, although generally optimistic. Manufacturers look for business to improve and plan to step up capital spending over the next six months. Retailers are somewhat uncertain about the strength of upcoming holiday sales at this point; nevertheless, they predict healthy sales for 1985 as a whole. Bankers expect commercial loan demand to remain strong for the fourth quarter and they say that current consumer loan demand levels can be maintained or increased with possible interest rate reductions.
Manufacturing
Industrial activity in the Third District is picking up, according
to the latest Business Outlook Survey. Thirty-six percent of the
companies participating in the November survey report increasing
business while only 11 percent say that their business is slowing
down. More nondurable goods producers indicate improvement than do
durable goods producers, who report fairly steady activity.
Manufacturers note improvement in the levels of new orders and shipments, but report little change in employment. Industrial prices in the Third District are stable; over three-fourths of the manufacturers polled say neither input costs nor output prices have changed this month.
Third District manufacturers are generally optimistic about the near future. A third of the November survey respondents expect the current level of activity to continue over the next six months, and about half anticipate further growth. Manufacturers expect increases in new orders and shipments, and are planning to step up capital spending. Durable goods makers, however, foresee some weakening in employment.
Retail
Third District retailers report that October sales fell slightly
below expectations, but indications are that a rebound had taken
hold by mid-November. As of the third weekend of the month, sales
for 1985 year-to-date generally conformed to earlier forecasts of an
8 to 12 percent increase over 1984. Philadelphia area retailers
attribute the October dip in sales to a strike that kept the city's
two major newspapers out of circulation for more than a month,
disrupting advertising and the distribution of promotional inserts.
Another factor cited for weak October and early November sales is
abnormally mild weather which has held down demand for seasonal
apparel.
As the Christmas selling season approaches, Third District retailers are stepping up promotional efforts that, they say, are necessary to maintain store traffic. Department store and general merchandise executives are still uncertain about prospects for holiday sales, and are reluctant to make forecasts until they see post-Thanksgiving results. Some merchants have expressed concern that consumers may have reached their limit of comfort on installment debt, and that this may dampen end-of-year sales. One major chain, however, reports that credit purchases are growing as a percentage of sales.
Finance
Total loan volume at large Third District banks rose just over 1
percent from September to October, reaching a level 15 percent above
that of October 1984. Commercial and industrial loan volume also
rose at a similar rate, and now stands 17 percent above its year-ago
level. Third District banks say that loan demand continues to be
strong from middle market companies that do not have convenient
access to the commercial paper market. Demand is also high for
receivables financing and other types of secured loans. Bankers
expect commercial loan demand to remain strong through the fourth
quarter but do not expect loan growth to match the third quarter's
pace.
Consumer loan volume increased approximately 1.5 percent in October to about 18 percent above its year-ago level. Some Third District banks report that demand for consumer installment loans has been very responsive to lower interest rates and promotional efforts and that further reductions in rates may be made in the near future.
Local bank economists have scaled back their predictions of growth for the next two quarters. Consequently, they have lowered their interest rate forecasts for the next six months. Their predictions now range from a general increase of up to 50 basis points to drops of 50 basis points or more in yields on Treasury securities of all maturities. They also expect a comparable drop in the federal funds rate.