September 15, 1976
Economic activity in the Third District is expanding, but at an uneven clip. While performance in the retail sector is mixed, conditions in manufacturing continue to improve gradually. Gains are reported in new orders and shipments, while work forces and inventories in manufacturing are unchanged. The longer-term outlook both in retailing and manufacturing remains optimistic. Bankers report that business borrowing is still weak and expect this to continue in the near term. Businessmen indicate that prices are still rising, but no substantial change in inflationary pressures is evident. Major manufacturers in the District report that production capacity is adequate to meet current requirements and expect to be able to meet customers' demands in the foreseeable future.
Manufacturers responding to this month's business outlook survey report that business is better than in August. Four out of ten executives surveyed indicate improvement in overall business conditions compared to three out of ten last month. New orders and shipments are higher; and inventories, which declined last month, are reported to be unchanged from a month ago. In terms of employment, the factory workweek is fractionally longer this month, while work forces are at the same level as in August. This is the first time since March that no growth has been recorded in the number of employees in manufacturing.
Despite the current pause in the national economy, the outlook in area manufacturing for the next 6 months is optimistic. Of the businessmen surveyed, two out of three project a higher level of economic activity by next March. Increases are anticipated in new orders, shipments and employment. At the same time, higher levels of spending for plant and equipment are projected by 40 percent of those surveyed—roughly the same proportion of respondents as last month. No additional investment is planned in inventories, which are expected to be virtually unchanged from present levels.
Retailers in the area paint a mixed picture with sales ranging from 16 percent above, to a level slightly below, the same period last year. No specific merchandise lines are cited as particularly strong or weak. The majority of retailers feel that "things are looking up" compared to the lull of a few months ago, but they view this improvement as gradual and below the forecasts they made earlier in the year. The outlook for the near term is for an improved sales picture, although no big surge in buying is expected until late in the year. One merchant anticipates a boost in sales after the election, and another looks for a loosening of purse strings for big-ticket items around the holidays. If this occurs on top of normal gift buying, this retailer feels that the fourth quarter will be fairly strong. However, he's doubtful that it will show any substantial improvement over the last quarter of 1975.
On the inflation front, manufacturers report paying and receiving higher prices this month. One-half of the executives in the current survey report paying more for their inputs, and one-third indicate charging higher prices for outputs. Over the next half year, 84 percent expect to be paying more for their supplies and 75 percent anticipate higher prices for their finished products. At the same time, retailers report that the hesitancy in consumer demand is helping to moderate the upward movements in the prices they pay for supplies.
Bankers in the region report that loan volume remains basically flat. Consumer loans are level or up somewhat, but there are no signs yet of any recovery in business borrowing. At the same time, retail savings deposits are rising, although most bankers feel that the increase has been disappointing in the face of the softness in short-term interest rates available elsewhere in the market.
Down the road, bankers are looking for the lull in business loan demand to continue. According to one executive, "We don't expect volume to improve before yearend, at the earliest." Another sees the possibility of the weakness continuing through the first quarter of 1977. The outlook for interest rates is for little change over the rest of 1976; and for 1977, forecasts of the prime rate call for an average of about 7 1/2 percent. This is down from a few months ago when a prime of 8 percent was considered possible by yearend 1976.
The question of production capacity was examined with executives in the food, apparel, chemical, petroleum, steel, nonelectrical machinery, and electrical machinery industries. For all of these industries, except chemicals, business is reported to be the same as, or better than, in June. Nevertheless, no major supply bottlenecks are reported, and any increased pressure on production capacity seems to be minimal.
Compared to a few months ago, operating rates in food, apparel, and petroleum are unchanged (90-95 percent). In chemicals, an executive of one large company notes that utilization in some fiber operations is down to 70 percent from 90 percent in early spring, At the same time, a major steel producer notes that one plant manufacturing rails is running near capacity, but another producing structural shapes still has plenty of slack. Conditions at both of these plants are about the same as in June. Two industries that report declining excess capacity are electrical and nonelectrical machinery. But in both of these industries, such reductions in unused resources appear to be slight. Operating rates are put around 85 percent—at most, only a few percentage points above June levels, Delivery times are lengthening in these industries, but not "significantly" according to the executives contacted.
For the longer term, manufacturers expect capacity utilization to rise somewhat, but none of the officials contacted foresees substantial problems in meeting customers' demands over the next 6 months.