Beige Book Report: Philadelphia
May 14, 1975
Over the last three months, the decline in Third District economic activity has been slowing. Area manufacturers report no change in the level of their new orders and prices, but inventories have declined markedly. These businessmen are optimistic, however, about an upturn in business activity within the next six months. They anticipate a significant upswing in new orders and hope to trim inventories even more. The employment picture in manufacturing for late fall continues to be optimistic, but there is still widespread concern that prices will continue to rise. Retailers are generally optimistic, too, but don't expect much of a pickup until near year-end. Area bankers report flat loan volumes, and few see much of a change before the fourth quarter.
Third District manufacturers, responding to this month's business outlook survey, report a continued leveling, in regional business activity with some indication that the steady economic decline that the region has been experiencing is "bottoming out." Responses to the questionnaire indicate that new orders this month were nearly level (an improvement over last month) while shipments were up slightly. Over 50 percent of these executives experienced inventory declines during the month. This is the third month in a row that substantial inventory cutbacks have occurred.
The longer-term outlook is the same this month as in April with three-fourths of the respondents expecting an accelerated pace of business activity by November. They also predict that the pace of inventory liquidation will be slowing down. The proportion of executives expecting their inventories to drop below current levels by late fall has declined substantially from last month. Caution, however, dominates spending plans for new plant and equipment. While three-fourths of this month's respondents see an increase in business activity six months out, 60 percent foresee no change in capital expenditures by November.
Employment levels mirror the flatness in business activity in May. Most Third District manufacturers report an unchanged work force and average workweek this month. By November over 40 percent expect to increase the size of their work force. With a growing labor force, however, there are no strong signs of any quick relief from high rates of unemployment.
Retailers in the area report that weak and sluggish sales are continuing They cite the cold and rainy weather that has followed on the heels of an early Easter as helping to keep the damper on spending. Further, no big "shot in the arm" to sales is expected from the tax rebates. Retail executives feel either that the rebate dollars have already been spent in anticipation of their receipt or that the money will be used to pay off debits. All in all, most retailers expect no significant upturn in sales until very late in the year, if one occurs at all. As one executive put it, "We're expecting business to stop declining, but we wonder how long we'll be on the floor."
On the inflation front, both retailers and manufacturers report continued moderation in prices. This month, between 80 and 90 percent of area manufacturers polled report no change in the prices of their inputs and outputs, but about half expect these prices to be higher by November. In the retail sector, most executives report moderation in the prices they charge. On the cost side, they indicate little pressure for higher prices from suppliers, but one said that he was encountering reluctance on the part of hard goods suppliers to lower their prices. With retail sales generally sluggish, he doesn't expect this reluctance to continue.
Area bankers report loan volumes down from the beginning of the year, but holding steady. Most report that they're looking to expand "quality" loans, but demand is flat. One banker expressed the view that potential borrowers were adopting a "wait-and-see-attitude"— looking for some clear signal that the upturn had begun. None of the bankers contacted expects a resurgence in the economy before year-end 1975 at the earliest. In this district there is broad agreement that the current spread between the prime rate and short-term money market rates will remain constant, at least until there's some measurable shift in loan demand. So far, few bankers see any clear signs that the demand for credit is being influenced by the fear of being "crowded out" of the money market. But one banker did express concern that mortgage rates might soon start to rise, thereby aborting any housing recovery in its early stages.