May 5, 1971
The economic outlook is brighter than a month ago, but caution remains the watchword of businessmen, bankers, and directors in the Third District. Manufacturers are optimistic about sales and new orders. On balance, they plan no further layoffs and hope to add to their payrolls during the second half of the years. However, they plan to hold the line on outlays for plant and equipment. Retailers report a noticeable pickup in sales. Most indicate, though, that the consumer remains bargain conscious. Bankers report a modest firming in loan demand, but say funds remain plentiful.
The modest expansion of Third District business activity is expected to continue, according to area manufacturers. A recent poll of area industrialists shows that for April almost four times as many firms are registering increases in sales and new orders than are realizing decreases. Regional executives are also optimistic about the outlook for May.
The sustained increase in business activity apparently is having an expansionary impact on hiring plans of area firms. Throughout the past twelve months, more area manufacturers were laying off workers than were hiring them. The latest check of area manufacturers indicates, however, that for the first time in a year the number of firms actually adding to their payrolls equals the number cutting back.
District manufacturers are optimistic also about the longer term outlook. More than 80 percent of them foresee the economy expanding half a year ahead. As a result of this anticipated expansion, over 40 percent of the industrialists plan to add to their payrolls by the end of the summer-triple the number hiring now. However, this optimism apparently is having little effect on spending plans for new plant and equipment. While 20 percent plan to increase investment outlays during the next six months, 25 percent plan decreases. The remainder expects no change.
Retailers in the area are "cautiously optimistic" about the consumer. One large department store reports that home furnishings have begun to pick up after months of sluggishness, but the consumer remains price conscious. For example, bedroom suites in the $400 category are moving while those in the $500 to $600 range are not. Small televisions and radios, rather than the larger and more expensive models, are selling well. Clothing items with substantial markdowns sell easily, while higher price items move slowly. Consequently, one larger retailer from a "quality store" indicates sales promotion will be bargain oriented. He won't drop higher price lines, but he'll emphasize sale-price items.
Businessmen in general are still uneasy about stock building. Retailers especially seem reluctant to build inventories. One director, who is a manufacturer, says that this cautious attitude also applies to wholesalers as well as manufacturers.
Most of the banks report some modest firming in loan demand, but they do not know how much of it relates to a pickup in economic activity and how much is explained by the midmonth tax date. All banks, however, still report overly plentiful supplies of funds. Their major problem remains knowing what to do with them. There is a growing division of opinion among local banks about the trend of long-term rates for the rest of the year. One group thinks that modest progress on the inflation front and a pickup in the economy spells higher rates toward the end of the year. The other group counts on the need for an adjustment from present rate spreads and a lessening of inflationary expectations to bring some further reductions in long-term rates. As far as the prime rate, one or two bankers thought that even though there was a modest pickup in loan demand, the recent increase was premature.
Bankers still are concerned about the quality of credit and the possibility for substantial loan write-offs, but they are increasingly hopeful that a reviving economy will bail some of these loans out.