June 15, 1977
Economic activity in the Third District is expanding but at an uneven pace. Sales at area department stores are reported to be mixed, while activity in the industrial sector continues to expand. New orders and shipments are higher than in May, while inventories remain stable. Employment and the workweek also continue to increase. For the longer term, retailers report widely differing sales forecasts while manufacturers anticipate additional improvement in business conditions. Plans for increases in capital spending over the next two quarters are less widespread than in previous months. Commercial bankers say that business loan demand is flat, but consumer loans are increasing. Housing markets are active, but with the exception of Atlantic City, no speculation in real estate is reported.
Manufacturers responding to the latest Business Outlook Survey report that general business conditions are better than in May. Of the executives surveyed, 42 percent say that business has improved this month. This is similar to the proportion reporting gains in the previous survey. New orders and shipments are higher in June, and inventories remain unchanged after increasing fractionally last month. At the same time, employment and the average workweek in the industrial sector continue to expand, although the gains are not as widespread as in May.
For the longer term, manufacturers continue to be optimistic. More than two-thirds of those polled expect better business conditions by year-end. Specific increases are projected in new orders by about two-thirds of the respondents, and shipments are expected to climb at a similar proportion of the sampled firms. At the same time, inventory levels are expected to increase over the period, and gains in employment are forecast as well. One out of three respondents plans to add to their work forces by December, and one out of five foresees a longer workweek. Increases in capital spending six months out are anticipated at one-third of the firms polled. This is down somewhat from last month and the lowest fraction since last summer.
Prices in the industrial sector continue to climb but increases are no more widespread than in May. Fifty-six percent of those sampled report paying higher prices for their inputs, while 29 percent are receiving higher prices for the products they sell. By December, about eight out of ten expect to be paying more for supplies and seven out of ten anticipate receiving higher prices for their finished products.
Department store sales in the area are mixed. Reports of current dollar sales range from 17 percent above to 8 percent below year-ago levels. For the most part, merchants say that sales are running somewhat below their expectations. They cite unseasonably cool weather, a public transit strike early in May, and going-out-of-business sales by a major competitor as reasons for sluggish performance. In general, inventories are said to be in reasonably good shape.
For the longer term, some retailers expect sales to remain weak throughout the next two quarters, while others look for a pickup. One merchant expects sales by the end of the year to be "about the same as last year in real terms with a 5 percent increase in current dollar sales."
Bankers in the region report that while consumer loans are expanding, business loan demand remains essentially flat. All of the banks contacted have hiked their prime rate to 6 3/4 percent, but bankers say that this has probably not slowed loan demand. One notes that his bank has made a few loans at rates below prime in order to attract some non-local customers.
For the longer term, bankers look for moderate gains in business loans and further increases in interest rates. One banker expects commercial and industrial loan volume by the end of this year to be about 6 percent above year-end '76. He notes that loan volume is currently running behind that expectation. At the same time, gradual increases in interest rates are expected with a prime rate at the end of the year in the 7-7 1/2 percent range.
The subject of real estate speculation was discussed with several contacts at various locations in the Third District. With the exception of Atlantic City, there are no reports of any speculative activity. Mortgage lending is reported to be strong in some parts of the District, but there is little in the way of "second mortgage" activity at the institutions surveyed. One executive of a large MSB in Philadelphia notes that, "We don't have any speculation in this area, and we don't expect to see any." According to this official, land prices and construction costs are going up at "expected" rates and appraisals of existing housing are not climbing "inordinately." Moreover, he adds that there is little or no excess demand for housing in the region, and this type of market will not support much speculation.
Commercial bankers in the Pocono Mountains resort area say that residential and commercial real estate markets appear to be "orderly"—sales activity and price movements are well in line with their expectations. In the Lancaster area, price increases for housing and farmland are about the same as last year. Some farmland there is being converted to commercial use, and all land that is being sold appears to be for the immediate active use of the buyers.
One area where real estate prices have gone up at a much faster rate than in the past is Atlantic City. An official with that city's Housing Authority attributes this to the recent legalization of casino gambling in that city. In one case, a lot which sold for $800 before the casino referendum sold for $10,000 afterwards. In this contact's view, "Some of these prices seem out of line, but with the casinos on the horizon, who knows?"