Beige Book Report: Philadelphia
December 1, 1986
Economic conditions in the Third District are generally good. Manufacturing activity increased in November for the fifth month in a row, and retail sales rose strongly in October and November following slower than expected growth in September. Total loan volume at major Third District banks increased in October at about the same rate as it has been growing since August, slightly above the pace earlier in the year. Bankers say this growth continued into November as well.
The outlook in the Third District business community is generally positive. Manufacturers expect to make further gains over the next six months. Retailers are optimistic for the Christmas shopping season and believe that 1987 will be a good year, although they expect the growth of sales to be somewhat less than it was this year. Bankers have the least optimistic views. They believe economic growth is likely to slacken next year, bringing a slowdown in lending and possibly lower bank profits.
Manufacturing
Manufacturing activity in the region is posting its fifth
consecutive monthly gain, according to the latest Business Outlook
Survey. Thirty-five percent of the industrial companies
participating in the November survey have stepped up operations from
last month's rate, while only 13 percent have cut back. Although
this is the most widespread improvement since February, specific
measures of industrial activity reflect only moderate growth this
month. New orders and order backlogs are edging up, and shipments
are rising fractionally. Employment indicators are mixed; the length
of the average workweek is increasing slightly, but payrolls are
unchanged. Overall, business conditions are slightly better in the
nondurable goods sector than in the durable goods sector.
Some upward price movement is noted by this month's survey respondents. Although two-thirds say their input costs are steady, 22 percent report paying higher prices for materials and supplies. Area firms have held the line on the prices of their own products, however.
Local manufacturers' expectations remain mostly positive. Looking ahead six months, 42 percent of the November survey respondents predict further improvement, 34 percent foresee steady conditions, and only 15 percent anticipate a slowdown. On balance, companies polled this month expect increases in new orders and shipments and a slight buildup in order backlogs. They also plan greater capital outlays over the next six months. However, most firms plan to hold employment at current levels.
Retail
Retailers in the region reported good sales in November, generally.
Department stores have been experiencing greater than expected
improvement over last year, with some marking gains in excess of 10
percent. Although discount stores are not achieving gains quite this
large, store executives say they are pleased with the year-over-year
increases they are making. Appliances and home furnishings are
selling particularly well. Merchants say the new lines of fall
clothing are proving to be very popular also.
While sales continue to be strong, store executives contacted recently say profits remain under pressure due to higher expenses. Many retailers are repositioning themselves for up-scale markets, which involves large up-front outlays for store remodeling, advertising, and new inventories.
Merchants say the current strength of retail sales indicates a good Christmas season for them, and they are raising tales projections accordingly. Looking into 1987, retailers in the region believe the first half, at least, should be good. The consensus forecast for the year as a whole calls for solid gains but a lower year-over-year increase than expected for 1985-1986.
Finance
Total loan volume at large Third District banks in October was up
approximately 12 percent from September and 16 percent above the
October 1985 level. Commercial and industrial lending is described
as strong by bank lending officers. However, narrowing net interest
margins and a concern for credit quality have led some banks to
direct funds to money market investments rather than loans.
Figures from weekly-reporting banks indicate that consumer loan growth slackened in October in the Third District, but banks contacted in November said that credit card and other consumer installment lending was picking up. Banks in the region are beginning to offer affinity group credit card programs and they are expanding promotion of home equity lending; however, they say it is too soon to tell whether these programs have significantly affected consumer borrowing.
Bankers expect economic growth to slow during 1987, and they expect both business and consumer loan demand to ease as a result. Regardless of economic developments in the coming year, bankers express concern about the outlook for bank earnings in 1987. Some note slower deposit growth currently, and say their cost of funds will rise if they have to pay more for deposits to support asset growth. The impact of the new tax law on banks is also mentioned as a negative factor for earnings.