November 10, 1976
Economic activity in the Third District is mixed. Retail sales are improving somewhat, but the manufacturing sector is at a standstill. New orders and shipments are unchanged from last month, and inventories and employment are lower. Nevertheless, the longer-term outlook both in retailing and manufacturing remains optimistic. Reports of cost increases in manufacturing are less widespread than in October, and prices for finished products are only marginally higher. Bankers continue to report weak business loan demand and foresee no substantial pickup over the next twelve months.
Manufacturers responding to this month's Business Outlook Survey report that overall business conditions are about the same as last month. This is the first time since January that these businessmen have not reported some improvement in general business activity. New orders and shipments are unchanged this month while inventories and employment are lower. Factory work forces have declined for the second month in a row and the average workweek is shorter for the first time since last December. The bulk of the work force reductions is in the durable goods sector—especially primary metals. Manufacturers in this industry report weakening demand for their products as a result of excess capacity in capital goods industries and the possibility that some of their customers are running down inventories.
Despite this widespread pause, area manufacturers see brighter business skies down the road. With the exception of inventories, which are projected to be at current levels six months from now, all major indicators are expected to increase. Specific gains are anticipated in new orders, shipments, unfilled orders, and work forces, along with an expanding workweek as well. At the same time, plant and equipment expenditures are expected to climb over the period. However, projections of gains six months out in manufacturing employment and capital spending are not as widespread as last month. In the current survey, 36 percent of the respondents plan to add to their payrolls over the next six months and 41 percent anticipate higher levels of capital spending. Last month, 46 percent expected to hire additional employees and 50 percent were planning hikes in spending for plant and equipment.
Reports of price increases for supplies are less widespread than in October, and prices for finished products in manufacturing are only fractionally higher. One-fourth of the executives in the current survey report paying more for their inputs compared to one-half reporting increases last month. At the same time, 15 percent of the businessmen surveyed report charging higher prices for the products they sell while 10 percent report lower prices. This "net increase" of 5 percentage points is down substantially from last month when 23 percent were charging more for their outputs and 5 percent were charging less. Half of the respondents who report receiving lower prices are in primary metals where some firms are attempting to bolster sagging demand by lowering prices. Over the next half year, 9 out of 10 businessmen expect to be paying more for their supplies and 7 out of 10 anticipate higher prices for their finished products.
Retailers in the area report that current sales are "substantially better" than they were over the past few months. The majority of merchants contacted put current sales levels at about 10 percent above the same period last year. The one exception indicates gains of only a "few percentage points" over year-ago levels. Despite this reported improvement, however, most retailers feel that the recent lull in retail activity has not come to an end. Several mention that consumers are still somewhat cautious and they note that unusually cold weather may have pushed sales of winter outerwear ahead by 4-6 weeks. Merchants are hoping that the next few months will show healthy sales activity, but they are less than certain in their projections. As one executive puts it, "Shoppers have the means to step up their buying, and we expect them to begin loosening their purse strings soon. Unfortunately, we haven't seen any signs of this yet."
Bankers in the region report that consumer loan volume is trending upward, but business borrowing remains flat. At the same time, bankers feel that this situation will probably not change significantly over the next year. One reports that some of his corporate customers are telling him they see little need for new bank loans arising in 1977. Another banker feels that business loan demand should pick up sometime, but he sees no indications as to when this might happen. There is general agreement that the conditions on loans will ease somewhat, but there is no active policy of price-cutting reported now.
For the longer-term, bankers feel that loan volume will expand moderately in 1977 with only a gradual increase in interest rates. Most of the bankers contacted look for a prime rate of 7 3/4 by year-end '77. Consumer loans are expected to be fairly strong next year, and projections for business loan volume range from 6 to l2 percent over average 1976 levels. The executive at the upper end of this scale notes, however, that to realize this, "we'll definitely have to hustle."