August 9, 1978
Indications from the Third District are that economic activity has picked up in August. The industrial sector is posting strong gains after a seasonal slowdown in July, and retailers report current sales to be well ahead of year-ago levels. For the longer term, manufacturers expect to hold their ground in terms of sales between now and February, but project a slight cut in employment. Retailers on the other hand, look for strong gains to continue throughout the next six months. Inventories are expected to remain unchanged over the period. Commercial bankers in the area say business loan demand is up, but have mixed views about future demand. All banking contacts expect interest rates to peak within the next six months.
Manufacturers responding to the August Business Outlook Survey say business is better this month after a seasonal lull in July, with over one-third of the respondents reporting an improved business climate in August. Supporting the claims of a pickup, responding manufacturers say both new orders and shipments are up over last month's levels. At the same time, factory work forces have grown fractionally and inventories have declined. A Director of this Bank agrees with these reports. He claims his business, in the nondurables manufacturing sector, has been doing well all summer and continues strong in August.
For the longer term, Survey participants say they expect to maintain the status quo over the next six months. Consistent with this projection, local manufacturers foresee only a marginal increase in new orders between now and February, with no change in the number of shipments at all. Consequently, businessmen seem to be taking a "wait and see" attitude with regard to business decisions. They plan to maintain inventories at their current levels and expect to hold the line on capital spending as well. Although no actual decline in business volume is anticipated, the lack of bullishness in the outlook might spell bad news for the local labor force. For the first time in the current recovery, Survey respondents say they plan to cut payrolls fractionally, and trim the length of the average workweek as well.
On the price front, manufacturers again report higher prices in the industrial sector. Over half of those polled this month report paying higher prices for raw materials, while about one-fourth say they're charging more for their finished products. Price increases are expected to become more prevalent over the next six months, with 77 percent of the executives surveyed projecting higher prices for inputs and 62 percent planning to hike the prices of the goods they sell.
Department store executives in the area say sales are very strong in August, a month that is usually soft. Reports of current dollar sales range from 8 to 26 percent over year-ago levels and up to 10 percent ahead of plan. This makes the fifth straight month in which gains have been posted by the local retail sector. Merchants attribute the continuing strength to several factors including favorable weather and an effort on the part of consumers to beat future price hikes by spending now instead of later.
This "buy now" attitude does not seem to be representative of businessmen with regard to inventories, however. Reports of stock levels range from "on target" to "a little thick" at this time. Those merchants with excess inventories expect to reduce their stocks to desired levels over the next six to eight weeks. Aside from this, businessmen foresee no changes in inventories (other than seasonal) between now and February. A Bank Director confirms these views.
Retail sales forecasts for the next six months vary, but merchants are generally optimistic. Most of those contacted say they don't believe that consumers are likely to overextend themselves during the period. Sales projections for the beginning of 1979 range from 5 to 13 percent over year-earlier levels. Although those at the lower end of the scale note that their projections for nominal growth probably imply no teal gains, they point out that year-earlier levels were extraordinarily high and believe it will be difficult to top them by a wide margin.
Area bankers say consumer loan demand is mixed but that business loan demand is up by as much as 8 percent over the same period last year. The reported levels of C&I loans are generally as planned or slightly better. As for the future, commercial bankers have mixed views. Forecasts range from virtually flat loan demand through early 1979 to a gradual pickup and possibly a boom.
The prime rate at all of the banks contacted is currently 9 percent. All contacts feel interest rates will top out sometime within the next six months, but differ as to when a peak will occur. Estimates of the peak prime range from 9 1/4 to 10 1/2 percent, with those people projecting a later peak at the upper end of the range. None of the bankers contacted have observed disintermediation at their institutions and do not consider it to be a potential problem at this time.