March 10, 1976
After a three-month lull, Third District economic activity is again picking up. The sluggishness in manufacturing which began in December has given way to noticeable expansion, and the retail sector continues its strong performance this month. In manufacturing, new orders are up substantially from last month and there is a modest net accumulation of inventories. At the same time, employment is higher and the average workweek is longer. Prices in this sector are up, but the price pressures are about the same as in February. The outlook in manufacturing for the next six months is for additional growth. Area retailers report healthy sales and look for further gains through the fall. Bankers in the region indicate that loan volume is still soft.
Manufacturers responding to this month's business outlook survey report that business conditions are substantially better than last month. This represents a return to expansion after a three-month period of sluggishness. In the current survey, 53 percent of the respondents report a higher level of business activity while the proportion indicating improvement in the December- through -February period averaged less than half of this. New orders are significantly higher, with almost half of those polled reporting increases. Employment and the average workweek are moderately higher as well. At the same time, inventory liquidation has given way to net accumulation this month, with a third of those surveyed reporting increases as compared with one fourth indicating declines. This is the first report of overall inventory accumulation in a year and a half.
The outlook in manufacturing for the next two quarters is for additional gains. Nine out of ten businessmen surveyed anticipate expansion. New orders are expected to be higher by Labor Day, and a slight net accumulation of inventories is projected. At the same time, close to 60 percent of the manufacturers polled plan to hire additional employees and 24 percent anticipate lengthening the workweek. In addition, four out of ten respondents plan to hike their spending for plant and equipment over the period.
Retailers in the area report good sales performance. Sales were expected to be about 10 percent above year-ago levels, and retailers indicate that current volumes are above that. Moreover, the growth is reported to be broad based with no appreciable difference between hard goods and soft goods. The outlook for spring and fall is for continued strength. One merchant expects fall to be better than spring, and another looks for fall sales forecasts at his store to be revised upward by Easter. All of the merchants contacted indicate that inventories are in good shape and commitments are lengthening. One executive notes that inventory commitments were running about five weeks ahead at this time last year while currently they are out around eight weeks.
On the inflation front, manufacturers report paying and charging higher prices this month, but there is no significant change in the distribution of responses from last month. Forty percent of the respondents report paying more for their supplies currently, and 20 percent indicate charging more for their finished products. The outlook is for additional price increases in the six months ahead. Four fifths of those surveyed expect to be paying more for their inputs over the period, and three fourths anticipate higher price tags for the products they sell. In the retail sector, price increases are generally reported to be "modest." One merchant notes that he is no longer seeing price cuts in electronics, while another indicates a gradual pickup in fiber prices, especially cotton. He adds that, with heavy demand, there is no particular problem in passing on these higher costs.
Area bankers generally report that loan volume is flat. Loan demand is expected to pick up, but there is a lot of uncertainty as to when this will occur. One banker expects loans to increase sometime in the second half of the year, "but we keep pushing the timing of the expansion farther into the future". Another notes that two views at his bank are for an increase by either midyear or "well into the last quarter of 1976". This banker adds that the market is very competitive with a lot of rate cutting, and he takes this as a sign of no expected pickup in loan demand very soon. "The kind of rate cutting we're seeing now is not the kind you'd see if people expected loan demand to move upward quickly."
The bankers contacted were unanimous in their views that short-term interest rates will move upward from this point, but there is uncertainty as to when the climb will begin. In any case, there is no expectation of any significant jump in short-term rates. The consensus is for a prime of 7.5 percent six months from now and 8.5 percent by the year-end. All of the bankers contacted feel that recent "problem list" disclosures have resulted in a more conservative attitude in granting loans. Nevertheless, city bankers feel that this effect is probably not significant. On the other hand, one country banker notes that, as a result of the disclosures, his bank's board of directors is much harsher on customers when scrutinizing loan requests. He adds: "There are a few delinquent loans that are being put into liquidation. I doubt that this would be happening if it weren't for those disclosures."