November 10, 1971
The general outlook for conditions in the Third District is one of cautious optimism. Manufacturing activity still seems somewhat sluggish although the prognosis for the next six months is an expanding regional economy. Consumer activity is on the upswing, and bankers see loan demand holding its own over the next few months. Most bankers are in favor of the floating prime in principle, but disagree on the mechanics of its implementation. The 4 percent guideline on dividends is generally well received.
District manufacturers seem optimistic about the level of general business activity but remain more cautious about trends for their own firms. For example, of the firms polled, nearly 50 percent report general business activity increasing in October and project continued expansion in November. But at the company level, although nearly 50 percent indicated increases in new orders and shipments for October, only 36 percent were willing to make such a forecast for November. In addition, a smaller percentage are planning to build inventories and add workers during November than reported such activity for October. The outlook for the longer term is more optimistic. Nearly 70 percent of the manufacturers foresee the regional economy expanding a half year ahead. As a result of this anticipated business expansion, close to 30 percent of the firms plan to add employees over that time span.
Consumer activity seems to be picking up steam. One banker noted that October had been one of their strongest auto loan months ever. Another felt that the strength of the housing market would generate a strong demand for household durables in the next few months. Members of the bank's board of directors also see a somewhat sluggish industrial sector and an active consumer sector. They feel that the lack of optimism in the business community is overstated, and may be the result of yet uncertain Phase II guidelines.
Area bankers report a gradual trend upward in loan demand, with strength coming in the construction, textile, and retail sectors. They expect demand to remain stable during the coming months but consider that to be good, given the situation for the same period in 1970. Philadelphia banks lowered their prime rate in October, and some did again recently. One banker was concerned that bankers would get little credit for lowering prime now, but would be criticized later if demand pressures forced the rate back up. Most bankers were in favor of the floating prime in principle but questioned the timing and mechanics of the plans so far adopted. One bank president felt that the public would view the floating prime as an effort to avoid controls. Another thought it should be tied more closely to the cost of bank funds (fed funds or CDs) than to other open market rates.
The board of directors, in general, is pleased by the 4 percent guideline set for dividends since it recognizes the need for dividend flexibility. However, a few members wonder if the guideline might not cause dividends to move higher than they otherwise would. They argue that the 4 percent maximum may become an "expected" 4 percent so that corporations feel compelled to give their stockholders as much as possible under the guideline.