July 12, 1978
Reports from the Third District indicate that regional economic activity is mixed. Business loan demand is strong at commercial banks and expected to improve further in the latter half of the year. Retail sales posted gains again in July, and although merchants have reservations about business conditions in the fourth quarter, they look for a strong fall season. Inventories are in "good shape" now according to contacts, and barring seasonal variation, no change in stock levels is planned over the next six months. District manufacturing growth has been stifled in July, but the slowdown appears to be a typical midsummer lull. If past seasonal patterns hold, we can look for a pickup in August. For the longer term, however, manufacturers are less optimistic than they've been in three-and-a-half years. Business at Third District vacation spots has been sluggish so far for the most part.
The recent expansion in manufacturing activity in the Third District has virtually died in July according to this month's Business Outlook Survey. Although work forces are larger at one-fourth of the firms sampled, general business activity, new orders, and shipments are all unchanged from their June levels. Inventories are slightly lower than they were a month ago. This midsummer slowdown may be seasonal though, and not a cause for concern. Such a drop-off in activity has been observed each July for the last eight years, and has typically been followed by an August rebound.
Looking ahead to January, Survey respondents foresee bleak prospects for the manufacturing sector. Less than one-third of those polled expect business conditions six months down the road to be any better than they are now—the lowest this proportion has been since November 1974. New orders, shipments, and inventories are expected to remain essentially unchanged over the next two quarters. Consequently, Survey participants expect no increase in the size of factory payrolls over the period, and even a slight trimming of the average workweek. Moreover, the level of capital expenditures is projected to remain unchanged for the remainder of the year.
A Director of this Bank, whose business is in manufacturing, agrees that the picture is less than rosy. He foresees a lack of real strength in the retail sector and projects a slowdown in new car sales next year, both of which could have trickle-down effects on the industrial sector.
On the price front, inflation appears to have picked up steam again in the manufacturing sector after abating somewhat last month. Half of those responding to the Survey this month report higher prices for inputs, while about one-third say they are charging more for their finished products. For the longer term, about 85 percent of those surveyed expect to pay higher prices for raw materials by January, and almost 70 percent project price hikes on the goods they sell.
Area merchants say business is strong this month, with reports of current dollar sales ranging from 8 to 15 percent over July '77 levels and either "on target" or ahead of planned volume. Downtown stores and their suburban branches are doing equally well. Retailers say their inventories are at approximately the desired levels at this time.
For the longer term, merchants are becoming more uncertain about the remainder of 1978 than they have been recently. While they look for a strong fall buying season, some weakening is expected later in the year, leaving projected January sales volume only about 4 to 8 percent ahead of year-earlier levels. Retailers may run into inventory accumulation problems in the next six months if the administration's proposed $15 billion tax cut is not realized. As one contact points out, some merchants assumed a tax cut was in the offing when they made fall and winter buying commitments a few months ago. If no cut materializes, retailers may be caught with larger inventories than planned.
Contacts at the Pocono Mountain and South Jersey shore resorts say that tourist and vacation business has been generally less than anticipated so far this season, and, in some cases, is running behind 1977 levels. They attribute the sluggishness to several factors including unfavorable weather through much of the spring and early summer, and an extended school year as a result of last winter's snows. As for the balance of the season, resort entrepreneurs look for a pickup and expect total trade this year to be 6 to 12 percent ahead of last summer. One area that warrants comment is Atlantic City. Officials in that town say that as a result of the onset of casino gambling this year, hotel/motel reservations are running 10 percent ahead of 1977 levels with further gains projected for the rest of the season.
Commercial bankers in the region say demand for both consumer and business loans is strong in July. Commercial loan volume is up 8 to 10 percent from year-ago levels and either as planned or ahead of projections for this period. The growth in local demand growth is outstripping demand growth from elsewhere in the nation by a considerable margin. As for the future, bankers foresee further increases in loan volume over the next two quarters, with January levels 10 to 15 percent above year-earlier figures.
The prime rate at all of the banks contacted is currently 9 percent, and is projected to rise another 50 basis points by year-end. Bankers foresee no significant disintermediation as a result of rising short-term rates. Deposit growth will slow, they say, but they do not expect a credit crunch.