July 13, 1977
Economic activity in the Third District is showing fewer signs of strength in July. Department store sales are uneven, and conditions in the industrial sector are only marginally better after improving steadily since January. New orders and shipments show little change this month, and inventories are holding steady as well. Employment in manufacturing is up minimally, but the workweek is unchanged. For the longer term, retailers anticipate continued softness, while manufacturers look for a pickup in business conditions. However, there has been no substantive change during the month in the capital spending plans of area manufacturers. Bankers report that consumer loans are generally increasing, but business loan demand is still weak. Resort areas in the district are having an excellent season so far, and prospects for the rest of the summer are good.
Manufacturers responding to this month's Business Outlook Survey report that general business conditions are only marginally better than in June. Twenty-three percent of the executives surveyed say that business has improved this month, while 15 percent indicate a slackening. This "net improvement" of 8 percentage points is the lowest since December. Both new orders and shipments are unchanged in July after increasing last month, and inventories are holding steady for the third month in a row. At the same time, factory employment is up fractionally, and the average workweek is unchanged. Each of these showed slight improvement last month.
Despite the lack of bullishness at the moment, manufacturers are optimistic about economic conditions over the next six months. Seventy-three percent of those polled expect business to improve by January. Specific increases are projected in new orders, shipments, and inventories, and gains in employment are expected as well. Twenty-five percent of the respondents plan to hire additional employees by the beginning of next year, and 28 percent expect to extend working hours. Increases in capital spending are anticipated at one-third of the sampled firms—about the same as last month.
Prices in the industrial sector continue to climb, but at a markedly slower pace than in the first half of this year. Forty percent of the respondents to the current survey report paying more for inputs, while 23 percent are receiving higher prices for finished products. These are the lowest proportions reporting such increases since mid- winter. By January, 88 percent expect to be paying more for supplies, and 78 percent anticipate receiving higher prices for the products they sell.
Department store sales in the area are mixed. Reports of current dollar sales range from 9 percent above to 5 percent below year-ago levels. In general, sales are equal to or below expected levels. Stores in the immediate Philadelphia area are experiencing slower sales than those in other areas of the district. Retailers indicate that inventory levels are generally satisfactory, and that their desired inventory-sales ratios are lower than they were a year ago. Over the next six months they expect to maintain the current ratio or increase it slightly.
Merchants are looking for a modest pickup of sales in the third quarter, but are generally bearish about the second half as a whole. While one expects year-end sales to be 12 percent above December '76 levels, most of those contacted project gains in the 5-6 percent range.
Reports from the Pocono Mountain and South Jersey shore resorts indicate that business has been better than expected so far this season, with record crowds over the Fourth of July weekend. Contacts in these areas attribute this to good weather conditions, improvements in the economy, and, in Atlantic City, the imminent beginning of casino gambling. In that city, some tourists have been attracted by the mistaken belief that they could gamble already, while others have come for one last look before the onset of the casinos. In addition, favorable weather has given a boost to commercial and sport fishing. Prospects for the rest of the season are good. Inquiries and advance reservations are said to be well ahead of last year's levels and much higher than expected in both resort areas.
Area bankers report that while consumer loan demand is generally strong, business loan volume remains weak. There is some pickup noted in business borrowing by regional customers, but totals are being kept down by a depressed national market. One local bank is making loans outside the Philadelphia area at rates below prime in order to attract borrowers in those regions. All of the banks contacted have maintained their prime rate at 6 3/4 percent, and no reduction is anticipated.
Bankers do not appear to be concerned about excessive deposit outflows as their "wild cards" mature. Some, however, have recently raised CD rates to the legal maximum, and are giving holders of "wild cards" advance notice of debenture offerings in an effort to retain those customers.
For the rest of the year, bankers' expectations about business borrowing are mixed. A few look for moderate gains, but one banker contacted anticipates no movement at all. Interest rates are expected to be steady or move up gradually with a prime by year-end in the 6 3/4-7 1/4 percent range.