October 11, 1977
Reports from the Third District indicate that economic activity is expanding. Retail sales are up, and manufacturing activity in the region continues to increase according to executives polled. Industrial employment, however, is virtually unchanged. Attitudes about future economic conditions are mixed. Manufacturers are less bullish than they've been in almost three years, but most retailers look for sales growth to at least keep pace with inflation over the next six months. Commercial bankers say that consumer loan demand is satisfactory, but that business borrowing continues to be sluggish. Interest rates are expected to climb over the next two quarters.
Directors of this Bank and manufacturers responding to the October Business Outlook Survey say that business is improving this month. Twenty percent of the respondents to this month's survey report that business is better than in September, while 3 percent say it has worsened. This "margin of improvement" of 17 percentage points is unchanged from last month. New orders and shipments are higher in October, and inventories have remained unchanged for the sixth month in a row. Despite this pickup, the employment picture, after brightening somewhat last month, is showing little improvement. Work forces have grown only fractionally, and the average workweek is unchanged from September.
Directors contacted agree that business is improving. One went so far as to say that current conditions are better than at anytime so far this year. Although Directors don't seem to foresee any large obstacles to future gains, they do say that future plans depend somewhat on Federal action on taxes and energy.
Manufacturers' optimism about general business conditions six months out continues to diminish. In the current survey, only one-third of the respondents look for improvement in economic conditions by April. This is the lowest proportion reporting such expectations in almost three years. Increases in new orders and shipments are anticipated, but again by the smallest fraction of sampled firms since late 1974. At the same time, inventories are projected to remain unchanged over the next six months, and only marginal growth in employment is anticipated. One-third of the executives surveyed plan to increase capital spending over the next two quarters—about the same as last month.
The pace of inflation in the District's industrial sector continues to slow. Twenty-seven percent of those polled this month report paying more for raw materials, while 20 percent say they are receiving higher prices for their finished products. For the longer term, manufacturers continue to foresee widespread price increases. Four out of 5 foresee higher prices for inputs by April, while about half project higher prices for the products they sell.
Retailers report that department store sales in the area are up. Current dollar sales are reported to be between 7 and 20 percent over year-ago levels. While one merchant says that sales are slightly less than anticipated, sales are generally at or above expected levels. Both center-city Philadelphia and suburban stores are doing well this month. Energy-related products, such as insulation and storm windows, are said to be moving extremely well. Retailers say their inventories are in good condition. While some report more rapid than anticipated inventory accumulation, they say this higher level of stocks is consistent with higher sales.
Most merchants are approaching the next two quarters with a slightly more bullish attitude than they have in recent months, and look for April '78 sales to be between 4 and 15 percent above year-earlier levels. Retailers are not worried, for the most part, that Federal tax and energy policies or inflation will put a damper on consumer buying, and they have not built such contingencies into their plans.
Commercial bankers in the area report that loan demand is mixed. Although the demand for consumer loans has softened recently, it is expected to pick up again with the introduction of 1978 autos. Business borrowing, however, is still generally sluggish. Reports of current levels of commercial borrowing range from 8 percent below to 6 percent above October '76 levels. Most bankers say that current loan levels are below expectations. All of the bankers contacted feel that at least part of the problem is the availability of alternative sources of funds to large borrowers. Consequently, smaller institutions, catering to smaller, local customers, aren't generally feeling the effects that larger banks are.
For the longer term, bankers anticipate little change from the
current trend in business borrowing. Interest rates are expected to.
continue climbing, with the prime rate (currently at 7 1/2 percent
at all of the banks contacted) going to
7 3/4-8 percent by the end
of the first quarter.
Bankers are showing mild concern over the possibility that rising short-term interest rates will cut off deposit inflows. They are also "somewhat worried" that uncertainty, generated by the possibility of renewed inflation next year, will have a detrimental effect on economic expansion. However, they do not yet consider this threat serious enough to alter future planning.