September 14, 1977
Economic activity in the Third District is expanding at an uneven pace. Department store sales are mixed, while activity in the region's manufacturing sector continues to increase. New orders and shipments are higher in September, and factory employment and the workweek also show signs of improvement. Manufacturer's inventories are down somewhat this month. For the longer term, retailers and manufacturers are less than optimistic. Most merchants expect a continuation of the recent trend of weak sales growth. In addition, the proportion of sampled manufacturers anticipating better business conditions six months out is the lowest in over two and a half years. Commercial bankers say that consumer borrowing remains strong, but business loan demand, although better of late, is still weak.
Manufacturers responding to the latest Business Outlook Survey report that business is improving in September. Of the executives surveyed, 26 percent say that business is better than last month, while 9 percent say it is worse. New orders and shipments are higher in September, and moderate gains in employment are reported as well. Both work forces and the average workweek are increasing for the first time since June. Inventories, however, are reported to be down somewhat after holding steady for the past four months.
Overall, the pickup in manufacturing activity in the District appears to be more widespread in durables than in nondurables. Comments by Directors of this Bank support this observation. Two Directors, whose companies manufacture nondurables, report that business has been slow over the last six months. While one is unsure about the future, the other expects a recent pickup to gain strength. Another Director, a manufacturer of durables, says business is better than anticipated, and looks for additional expansion next year.
Despite the improvement in general business conditions in the current period, manufacturers are not very optimistic for the longer term. In the latest survey, 43 percent of the respondents anticipate improvement in economic conditions over the next two quarters. Expectations of gains six months out are now less widespread than they've been in over two and a half years. Increases in new orders and shipments are anticipated at about half the sampled firms. These are the lowest proportions projecting increases in these categories in a year. At the same time, inventories are expected to be unchanged over the period, and little growth is anticipated in employment. Thirty-seven percent of the sampled firms project increases in capital spending over the next six months. This proportion is roughly unchanged from last month.
Prices in the industrial sector continue to increase, although prices received by manufacturers are climbing at a slightly slower pace than in August. Forty-six percent of those surveyed report paying more for inputs, while 23 percent say they are receiving higher prices for the products they sell. For the longer term, 4 out of 5 project higher prices for raw materials by March, while 3 out of 5 look for higher prices for their finished products. This latter proportion is down somewhat from August.
Reports from retailers indicate that department store sales in the area are mixed. Current dollar sales are reported to be between 2 and 22 percent above September '76 levels. Hard goods, specifically furniture, are selling extremely well. However, while one merchant says sales are better than anticipated, most say they are below expectations. In general, suburban stores are doing better than those located in downtown Philadelphia. Retailers say their inventories are in good shape overall, and feel they would not be overstocked if a period of extreme softness developed.
As for the outlook, most merchants contacted are "cautiously optimistic" about economic conditions between now and March. While one expects to see March sales 15 percent above year-earlier levels, others look for gains in the 5 to 7 percent range. Retailers do not seem to be concerned either that high levels of consumer installment debt will be putting a damper on sales in the latter part of the year, or about the possibility of a downturn in the economy next year.
Bankers in the region report that consumer loan demand continues to be strong, but that business loan activity, while better in recent weeks, is still below expectations. Reports of current levels of C&I loans range from 3 percent below to 8 percent above year-ago levels. Most of the bankers contacted say that although borrowing by local business is at or above expected levels, the national market continues to be depressed. They feel that the national sluggishness results, in part, from the availability of alternative sources of funds to larger firms.
For the longer term, most of the bankers contacted anticipate expansion of business borrowing through the first quarter of 1978, with business loans at that time 6 to 7 percent above March '77 levels. Interest rates are projected to climb, with the prime rate, currently at 7 percent at all of the banks contacted, expected to rise to 7 1/4 - 7 1/2 percent by March.
Bankers appear to be only "mildly worried" that the rising short-term rates will cut off savings inflows. They anticipate real growth in the 3 to 5 percent range next year, and do not expect that higher short-term interest rates will lower this rate of growth.