September 15, 1971
The increase in optimism about the economic outlook in general that followed President Nixon's speech in mid-August has had little effect on the specific plans of individual firms in the Third District. Most are still taking a wait-and-see attitude about how the new economic policies will affect their own firms. Area bankers are generally hopeful of a further pickup in loan demand on a wide front. Several of them also look for higher interest rates near the end of the year and into 1972.
Host businessmen in the Third District are hopefully optimistic about the economy. Before the President's speech, the prevailing view was that business was recovering from last year s recession but that inflation would remain a serious problem because of rising labor costs. The President's new economic policies have been greeted favorably, and did increase the general level of optimism about the economic outlook. However, it is difficult to detect much of a change in the outlook businesses now have for their own firms.
For example, in terms of such key indicators as new orders, shipments, and unfilled orders, District manufacturers are no more optimistic now than they were a month ago. As for capital expenditures, there seems to be a slight boost in outlay plans, but most manufacturers want to wait until the incentives for new plant and equipment are more certain and projected sales actually materialize. There is no noticeable increase in hiring plans since early August. On the price front, area manufacturers are a little less pessimistic than before the President's speech.
Loan demand at Philadelphia banks has shown some pickup in recent weeks, but the increase has been modest for most banks. Most of the increase in loan demand reflects rising business demand for credit. Consumer borrowing is flat at all but one large bank, and in that one only up slightly. Only one of the banks we contacted was willing to attribute much of the increased loan demand to foreign sources, although weekly reporting statistics indicate a strong counterseasonal upsurge in the foreign loan picture.
Looking ahead, local bankers are generally hopeful of a further pickup in loan demand. One banker looked to inventory building as a source of loan demand. Another said that an expanding economy in general would lead to more loan demand. Another thought construction might provide additional stimulus.
As for interest rates, the consensus among bankers is that the Federal funds rate is out of line with other short-term rates and will likely drop in the near future. Looking toward the end of the year, however, several bankers thought rates would start climbing. One banker said as the economy picks up steam, "rates are bound to rise". Another thought the inflation premium would probably increase after the freeze on wages and prices. Still another indicated that the cost of money for banks would likely go up and this would in turn push up bank rates.