October 11, 1978
Indications from the Third District are that current business conditions are good overall. Continued growth in the industrial sector and expanding employment are being reported. For the longer term though, manufacturers expect the economy to slip somewhat. Retail sales are mixed for the second month in a row, causing some merchants to believe the pace of consumer expenditures may finally be slowing down. Sales forecasts for the next two quarters are varied. Area bankers say business and consumer loan demand remains strong in October and look for slow and steady growth through early 1979. Interest rates are rising and are expected to peak in the first quarter. Although no serious disintermediation has been observed, bankers are concerned that it may become a problem in the future.
Manufacturers responding to the October Business Outlook Survey say the industrial sector continues to expand at about the same pace as last month. Supporting this claim, Survey respondents indicate higher levels of new orders and shipments and fractional growth of inventories. The continued expansion has given local employment a boost for the eighth consecutive month, with substantially larger payrolls reported in October as well as a marginally longer workweek.
Looking ahead six months, manufacturers continue to foresee a worsening of the business climate. Nearly one-third of the respondents this month expect a decline in general economic activity by the end of the first quarter. Consequently, new orders and shipments are projected to remain at their current levels and a fractional trimming of inventories is planned. Factory work forces are expected to hold their current levels over the period but a slight decline in the length of the average workweek is planned. A Director of this Bank, whose business is in the manufacturing sector, takes issue with the view that a turndown is imminent. His business is currently strong, and he sees no recession until at least 1980.
On the price front, over half of those surveyed this month report paying higher prices for raw materials, while less than one-third are charging more for their finished products. For the longer term, 80 percent of the respondents foresee continued increases in the cost of inputs, and 57 percent plan to hike the prices of the goods they sell.
Reports of current dollar sales range from "just about even" to 14 percent above year-ago levels. Retailers at the lower end of the range say their sales are slightly below planned volume while for those at the upper end, sales are about 3 percent over anticipated levels. Inventories are reported to be in good shape. Contacts at the stores experiencing sluggishness in October cite several causes for the poor performance including uncertainty among consumers about the strength of the economy and the possibility that "the consumer may finally be reaching the end of his credit rope." It should also be noted that sales volume last year at this time was extremely high, making large gains this year difficult.
Looking ahead to the next six months, local merchants have widely varying expectations. Although some are fairly optimistic and look for first quarter sales to be as much as 11 percent higher than year-earlier levels, others are more conservative in their projections and expect to simply match early 1978 volume. None of the retailers contacted has assumed a tax cut in his forecast.
Local bankers say loan demand remains generally strong this month. Consumer loans continue to grow and C&I loans are reported to be 1 to 7 percent over year-end figures. Business loan demand is slightly ahead of planned levels overall. Bankers contacted say they have seen the underlying demand for business loans grow slowly and steadily over the past several months, so that unconventional loans are less necessary. As for the future, bankers look for continued strength in loan demand over the next two quarters. One contact feels that part of this continuing demand growth will come from the retailing sector. This person anticipates a slowdown in retail sales in the near future and, as a result, an increased demand for funds as retailers find it necessary to finance excessive inventories.
The prime rate at all of the banks contacted in October is 9 3/4 percent. Interest rates are expected to rise again in the near future, and to continue their climb through the first quarter of next year. All bankers contacted expect to see a prime of at least 10 percent by year-end, and a first quarter average of 10 or 10 1/4 percent. They look for a peak early in 1979 that could go as high as 11 percent.
Higher interest rates appear to have begun to take their toll on deposit flows. Although no one contacted sees a serious disintermediation problem yet, bankers are worried about a slow but accelerating runoff in time and savings deposits. The variable-rate money market certificate is mentioned as a primary force in counteracting possible deposit erosion as a result of high interest rates.