November 9, 1977
Indications from the Third District are that economic activity is expanding, but at an uneven pace. Retail sales are up for the second consecutive month according to executives in that sector, but manufacturing activity is virtually unchanged from October according to the latest Business Outlook Survey. For the longer term, both retailers and manufacturers appear to be more optimistic about future economic conditions than they have been recently. Retailers expect sales in real terms to at least hold steady and manufacturers foresee increases in employment and capital spending. Commercial bankers say the demand for consumer loans is very strong, but that commercial borrowing is mixed. Interest rates are expected to increase over the next six months.
Manufacturers responding to this month's Business Outlook Survey say that general business conditions are only marginally better than they were in October. Fifteen percent of the respondents indicate an improvement, while 6 percent say conditions have worsened. Both new orders and shipments are unchanged in November, while inventories are down slightly. This represents the first inventory decline in nine months. Consistent with these reports, employment, which was up fractionally in October, and the average workweek in manufacturing are unchanged from last month.
Despite the apparent lack of economic improvement at the moment however, manufacturers seem to be getting more bullish about future business conditions. About half of those responding to the November survey say they expect business to get better over the next six months. A similar proportion anticipates increases in new orders and shipments. Inventories are expected to remain unchanged over the period. This optimism is reflected in hiring and spending plans. Twenty-four percent of the respondents plan to add to their payrolls by May, and 18 percent expect a longer workweek. Increases in capital expenditures are projected at one-third of the firms sampled.
Price increases in the industrial sector continue to become less prevalent. Twenty-four percent of the executives surveyed this month report paying more for inputs, while 15 percent say they are receiving higher prices for the goods they sell. For the longer term, 85 percent foresee higher prices for raw materials by May, and 59 percent expect to get more for their finished products by that time.
Department store sales in the region are up this month according to area retailers. Current dollar sales are reported to be between 5 and 15 percent above year-ago levels, and generally above anticipated levels as well. Both downtown and suburban stores are doing well this month. Favorable weather and a "willingness to buy" on the part of the consumer are cited by retailers as reasons for the strong sales. Overall, inventories are said to be in good shape, and retailers feel they are in a position to deal with any unforeseen change in economic conditions which might develop.
Looking at the future, merchants continue to gain optimism but still remain somewhat cautious. Those contacted expect to see gains of 6 to 15 percent over year-earlier levels by the end of the second quarter. Uncertainty about future effects of Federal energy policy and possible income tax changes in Pennsylvania still persists among retailers. However, they have not adjusted future plans on the basis of this uncertainty at this point.
Area bankers report that while the demand for consumer loans is quite strong, business loan demand is still mixed. Current levels of C&I loans are reported to be between 3 percent above and 9 percent below year-ago levels. Although one contact says commercial borrowing is slightly above planned levels, most say it is substantially lower than anticipated. All of those contacted agreed that borrowing by local businesses was better than national borrowing at their banks.
For the longer term, bankers foresee little or no change from the current trend in commercial borrowing. They feel that businessmen are still very unsure about the future, and therefore will not be willing to commit themselves to projects that require large sums of borrowed cash. Host banks forecast at least one more round of interest rate hikes, pushing the prime rate to 8-8 1/2 percent by June. The prime is currently 7 3/4 percent at all of the banks contacted.
Bankers say they have experienced some outflow of savings deposits, owning to higher short-term interest rates, but that they are not concerned about the possibility of this becoming a major problem. One contact noted that higher short-term rates would have more of an effect on the demand for funds than on the supply, saying that, "if the spread between the commercial paper rate and the prime becomes much larger, we can expect to see a significant number of borrowers turning to the paper market instead of to banks."