September 13, 1978
Reports from the Third District indicate that business conditions are generally good. Manufacturers note continued expansion and gains in local employment, but are not nearly as optimistic for the longer term. For the first time since early 1974, respondents to the Business Outlook Survey foresee a downturn in economic activity within six months. Retail sales are reported to be sluggish this month, but the slowdown can probably be explained by some unusual conditions. Merchants are less bullish about business conditions six months out than they have been recently, some citing overextension to the consumer as a cloud in the sales picture. Area bankers say loan demand is strong and expect it to remain so through early next year. Interest rates are expected to rise between 25 and 100 basis points over the next six months, but there is little agreement about when a peak will occur.
Manufacturers responding to this month's Business Outlook Survey say business continues to pick up steam in September. One-third of this month's respondents say general economic conditions are better than they were in August while less than one-tenth say the business climate has worsened. In terms of specific indicators, new orders and shipments are substantially higher in September, while inventories have reportedly stabilized. On the job scene, the continued expansion has been good news for local labor. Both the size of factory work forces and the length of the average workweek are growing in September.
Looking ahead to early 1979, local manufacturers continue to lose confidence. In fact, for the first time in over four and a half years, Survey respondents are predicting a fractional decline in general business conditions within six months. Consistent with this bearish outlook, new orders are expected to fall, and shipments and inventories are projected to remain at their current levels between now and March. Respondents don't see the anticipated slowdown as having a large impact on employment or capital expenditures, however. Factory payrolls will remain at their current sizes, according to the Survey, but the workweek could be trimmed marginally. At the same time, manufacturers plan to hold the line on plant and equipment expenditures.
Inflation continues in the local industrial sector in September as price hikes become more widespread. Of the manufacturers polled, 3 out of 5 report paying higher prices for inputs this month while 2 out of 5 say they're charging more for their finished products. For the longer term, about 80 percent of the respondents expect the cost of raw materials to be boosted within the next six months, and half plan to raise the prices of goods they sell.
Area retailers say sales are sluggish in September. Although moderate gains over year-ago levels are reported, sales volume has not quite kept pace with the retailers' optimistic expectations. Merchants offer a variety of reasons for the shortfall. Year-ago sales figures reflect the opening of a new shopping complex in central Philadelphia and are considered to be unusually high and difficult to match. Moreover, ongoing political demonstrations in the downtown area have kept many shoppers away, possibly depressing sales figures below what they would otherwise be.
Retailers contacted have mixed views regarding the course of economic activity over the next six months. Forecasts of sales volume at the end of the first quarter of 1979 range from "flat" to 6 percent over year-earlier levels. Those merchants whose projections are at the lower end of the range foresee overextension of the consumer becoming a problem by early 1979, probably after the holiday shopping season. Retail inventories are unanimously reported to be in good shape currently, with no changes in the inventory-sales ratio planned.
Local bankers say loan demand is strong in all categories. Business loan volume is up as much as 20 percent over September '77 levels and generally "on target." Similar increases are noted in consumer loans. As for the next two quarters, bankers expect loan demand to continue to be strong.
The prime rate at all of the banks contacted is currently 9 1/4 percent. Interest rates are projected to rise over the next six months but contacts differ as to how high they will go. Although all expect to see a peak between now and March, estimates of that peak range from 9 1/2 to 10 1/4 percent. There is widespread concern that the peak will be only temporary and that subsequent rate hikes will be observed and a cyclical peak will be reached late next year.
Deposit flows appear to be satisfactory at this time with no disintermediation problems observed or anticipated. Bankers expect to continue to be able to meet loan demand between now and March '79.