Beige Book Report: Philadelphia
August 3, 1987
Economic activity in the Third District is growing at a moderate pace, as indicated by information obtained in July. Manufacturers reported that business is improving at about the first half's modest rate. A reversal of the first half's downward trend in orders and a slight pickup in employment in July are encouraging signs for the industrial sector. Retailers contacted in July said the healthy pace of sales they have experienced for the past few months is continuing, with warm weather bolstering sales of summer clothes and seasonal goods. Growth in total bank lending in the region has slackened a bit since the beginning of the year, but Third District bankers report that business and real estate lending has been growing steadily for the past four months. Consumer lending, as classified for reporting purposes, appears to have fallen off, but some bankers say a drop in credit card lending has been offset by home equity loans. Deposit growth, however, has slowed, largely due to a run off in long-term certificates of deposit.
The outlook in the Third District business community is for continued growth but at a somewhat slower pace. Manufacturers expect improving business for the rest of the year, although they are not planning significant increases in hiring or capital spending. Retailers expect the current growth of sales to slacken, but still forecast a good second half. Bankers expect slower growth in economic activity in the region in the next several quarters to result in smaller increases in loan volume than were booked in the first half of the year. Nevertheless, they express some concern that they may not be able to fund planned loan growth without raising interest rates paid on deposits.
Manufacturing
The modest growth that the region's industrial sector experienced in
the first half of the year is continuing, according to the latest
Business Outlook Survey. Just over one-fourth of the firms
participating in the July survey stepped up production from June's
pace, while 16 percent cut back; around half were operating at a
steady rate. Conditions appear to be slightly better for durable
goods producers than for nondurables makers. Reflecting the overall
trend of slow growth, most measures of industrial activity made only
fractional gains in July. New orders and shipments rose slightly,
continuing the first half's pace. Showing more improvement, order
backlogs turned up after declining for five months in a row, and
employment rose fractionally for the third time this year. Although
three-fourths of the companies surveyed in July reported steady
payrolls, 17 percent added workers, while only 8 percent made cuts.
Industrial prices in the region remain generally stable, although
input costs are showing some upward movement.
Looking to the future, area manufacturers contacted in July are mostly optimistic, but remain conservative in their planning. On balance, survey participants forecast gains for new orders and shipments, and larger order backlogs by the end of the year. However, local manufacturers do not expect the recent improvement in employment to continue, and they are planning only modest increases in capital spending. Price expectations are mixed. Half of the firms polled in July intend to hold the line on the prices of their own products, but one-third plan increases in the next six months; 60 percent anticipate higher prices for purchased goods in the next six months, while one-third expect no change.
Retail
Merchants contacted in late July reported healthy rates of sales
continuing from June. Store officials say sales for their fiscal
second quarter (May-July) will probably meet or exceed plans, with
increases from the year-ago period around 10 percent in dollar
terms. Retailers say a long spell of hot weather has resulted in
greater than expected sales of summer apparel and seasonal items.
Less robust performance has been turned in by home furnishings and
major appliances.
Looking past the usual summer lull to the fall, retailers expect sales growth to slow from its current pace and to run about "average." They do not believe that business can continue to increase substantially unless overall economic growth accelerates.
Finance
Total loan volume outstanding at major Third District banks in early
July was about 5 percent above the level at the beginning of the
year. Loan volume appeared to be increasing at about a 10 percent
annual rate in July, consistent with the second quarter's rate but
slower than the first quarter's pace. Bankers contacted in July say
that commercial and industrial lending and real estate lending are
growing, but that consumer lending has fallen off. However, some
commercial bank credit officers have analyzed the shift from credit
card borrowing to home equity loans by their customers, and they
conclude that total lending for personal expenditures is still
increasing at about the same rate as it has grown over the past
twelve months, around 10 percent annually for large Third District
banks as a group.
Third District bankers generally expect a period of sluggish economic growth ahead, resulting in a smaller increase in overall loan demand in the second half of the year than in the first half. With slower loan growth, some bankers say gains from the purchases and sale of securities will account for an increasing share of revenues, and that this will increase the variability of their earnings.
Most large banks contacted in July reported that deposit growth has been slower than expected since May. Long-term certificates of deposit are not being rolled over and bankers believe these funds are being reinvested outside the banking industry. However, total deposits continue to rise as a result of strong growth in other accounts, especially interest-bearing checkable deposits. Nevertheless, bank asset/liability managers say they may have to raise rates on money market deposits and other short-term accounts later in the year in order to maintain deposit growth in line with planed asset growth.