March 15, 1978
Indications from the Third District are that economic activity is generally sluggish. Manufacturers report only a weak increase in business activity, and continued inclement weather has taken the steam out of retail sales. Over the next two quarters, manufacturers look for renewed expansion in their sector, but retailers say unresolved tax policies and inflation raise unanswered questions about the next six months. Area bankers report stronger business loan demand in March, but they too are uncertain about future conditions. They foresee an increase in interest rates, along with the possibility of disintermediation.
Manufacturers responding to the latest Business Outlook Survey indicate some improvement in business conditions in March. In terms of specific indicators, new orders and shipments are both reported to be higher in March, while inventories are stable. On the job scene, factory work forces are essentially unchanged for the fifth straight month, but the average workweek is reported to be slightly longer.
Comments by Directors of this Bank are consistent with these reports. They indicate that despite bad weather and the nationwide coal strike, business volume is holding up well. One director, representing the energy industry, attributes the negligible effects of the coal strike to several factors, including the flow of non-union coal into the area. Moreover, as we move into a low power usage season, the demand for coal tapers off, making shortages less serious.
For the longer term, Business Outlook Survey respondents still look for gains, but the proportion of respondents expecting improvement continues to diminish, as it has done since the beginning of 1977. In the current Survey, less than half of those polled forecast a pickup in business activity over the next two quarters, compared to almost 90 percent a year ago. New orders and shipments are projected to increase, but again by a shrinking percentage of respondents. Moreover, there is less optimism among manufacturers about the employment situation than there has been since September. The size of factory payrolls is expected to increase only fractionally over the next six months, with virtually no change in average weekly hours worked. Capital spending plans, however, are still strong. Over 40 percent of the respondents to the Survey report plans to increase expenditures on plant and equipment between now and September.
Price increases in the industrial sector are becoming more prevalent. In this month's Survey, half of the respondents report paying higher prices for inputs, while over one-third say they are charging more for their finished products. As for the future, manufacturers look for continued price hikes. About 75 percent of those surveyed say they expect to pay more for raw materials by the end of the summer, and about 70 percent plan to increase the prices of the goods they sell.
Current retail sales are reported to be flat or slightly ahead of last year, according to merchants contacted this month. These levels are generally at or marginally below planned sales volume for this period. Retailers point to weather as the major cause of depressed sales throughout the first quarter. They say, however, that lost sales should be made up, at least in part, in the spring buying season.
Retailers are unsure about the level of future sales. They say that unresolved tax policy and the uncertain course of future inflation disallow any definite position. Should a tax cut be instituted and inflation not worsen, merchants look for some gains in real sales over the next six months.
Commercial bankers in the area say that consumer loan demand is weaker than it has been recently. Business borrowing is stronger, but about as expected. Bankers attributed the departure from the recent sluggish trend in business loan demand to several factors. They believe that executives generally expect higher interest rates in the future and are attempting to take advantage of current rates. Moreover, at least one bank in the region is offering fixed-rate, short-term loans. Contacts at that bank say the recent increase in borrowing there is, in large part, the result of that program.
For the longer term, contacts were uncertain about the future course of business loan demand. Current projections over the next two quarters range from "no change" to "moderate expansion."
Area bankers say that higher short-term interest rates have had only a negligible effect on deposit flow at this time. They do, however, anticipate significant disintermediation should short-term rates rise another 50 basis points—and bankers expect that they will. Inflationary pressures, off-set somewhat by slower economic growths are expected to push interest rates up over the next six months, with a prime rate (currently 8 percent at all of the banks contacted) at 8 1/2 percent by September. Despite the possibility of deposit outflows though, a credit crunch similar to that of 1974 is not foreseen, because banks are generally more liquid now than they were at that time.