Beige Book Report: Philadelphia
January 27, 1988
There are mixed signals in the Third District economy as 1988 begins. Manufacturing activity was flat in January, although factory employment continued on an upward trend. Retail sales for the holiday season increased year-over-year, except for women's apparel and consumer electronics, and met or exceeded merchants' expectations. The growth of aggregate bank lending was slowing, with consumer loan volume at a standstill and business lending up just slightly; however, real estate lending continues to move up strongly.
Most business contacts expect little growth in 1988. Manufacturers forecast only steady business for the first half, and they do not expect to continue adding to payrolls. Retailers said sales in January were good, but they expect consumers to step up their buying only slightly, if at all, as the year progresses. Bankers, citing the improvement in the manufacturing sector in 1987, are optimistic that commercial lending will regain momentum this year, but they do not expect strong demand for consumer credit.
Manufacturing
The region's manufacturing sector marked time in the first month of
the year. After expanding through most of 1987. Two-thirds of the
industrial firms participating in the January Business Outlook
Survey reported steady business, and the number of companies
starting the new year at a slower pace nearly equaled the number
stepping up production. Durable goods makers reported sane
improvement, while nondurable goods producers said business was
steady.
Specific measures of industrial activity in January showed little change from December. Order backlogs leveled off and inventories moved higher, indicating an easing from last year's operating pace. However, fractional increases in new orders and shipments were reported. Employment also posted a slight gain for the ninth consecutive month; although 75 percent of the companies surveyed in January were maintaining steady payrolls, 19 percent added workers while only 6 percent made cuts.
Despite the apparent interruption of growth in January, survey respondents reported continuing upward movement in prices --60 percent said input costs were higher than in December, and nearly 40 percent raised prices for their own products. Looking to the first half of 1988, 72 percent of the respondents predict further increases in the prices of goods they purchase and 41 percent plan to charge more for the goods they make.
January's pause in manufacturing growth appears to be coloring survey participants' views of the future. Neither production nor employment is expected to change from current levels in the first half of 1988. These expectations, combined with an anticipated modest increase in shipments, should work to reverse this month's inventory buildup.
Retail
Most Third District retailers queried in January said sales for the
Christmas season met expectations, and some department stores and
general merchandise stores reported that sales were above plan.
Overall, area merchants said sales were about 5 to 7 percent above
1986 results, in dollar terms. Discount stores and department stores
catering to relatively affluent clienteles turned in better
performances than stores selling middle price range merchandise.
While promotional discounting in the days just before Christmas was greater than planned for many stores, most retailers said margins were not seriously reduced. This was not the case for specialty shops, however. Despite large markdowns, stores selling women's apparel and consumer electronics did not have a good season. Some reported sales declines of up to 10 percent from 1986.
Merchants contacted in mid-January said sales were running at a healthy pace, but they are worried about the year as a whole. Most have adjusted their purchasing plans for a year of slow or no growth in sales, in real terms, and many specialty stores have cut back plans for renovations and expansion.
Store executives said cost containment will command attention this year. Labor costs are rising as stores face shortages of salespeople and other workers. Also, retailers reported that costs of imported goods are rising more rapidly now than in the past few years, and consumers are resisting stores' attempts to pass cost increases through to selling prices; consequently, profit margins on imported goods are falling and stores are turning to domestic suppliers.
Finance
Loan growth at major Third District banks was slowing as 1987 came
to a close, continuing a trend that began at the start of last year.
Among the major credit categories, real estate lending is strongest
and consumer lending is weakest. Total personal loan volume
outstanding near year-end 1987 was only 3 percent higher than in
December 1986, and bankers surveyed in mid-January said consumer
lending has been flat or down in recent weeks. Most bankers expect
little growth in this type of lending in 1988.
Although growth in commercial and industrial lending eased during 1987, bank credit officers contacted recently believe lending to businesses will accelerate, and some have already noticed an increased demand for commercial credit. Bankers believe economic conditions in the region will remain good for most of 1988, spurring financing needs of local businesses, particularly manufacturers.
Total deposits at large Third District banks in December were at the same level as in December 1986. Demand deposit balances have declined since October, ending the year lower than where they started. Growth in nontransactions deposits, while slow, has accelerated in recent months. Some bank asset/liability managers indicated in January that they were boosting interest rates on certificates of deposit in anticipation of tighter money market conditions in the second half of 1988.