November 15, 1978
Reports from the Third District indicate that the local economy continues to grow but at a slower pace than in the past few months. Businessmen are not generally optimistic about future prospects. In the manufacturing sector, gains are less widespread than they have been recently, and the effects of the growth slowdown have stopped the expansion of industrial employment. For the longer term, manufacturers see little improvement in business conditions. Retail sales are sluggish this month. Merchants' forecasts of Christmas sales this year are mixed, but a slowdown in 1979 is generally expected. Local bankers say business loan demand is soft and foresee no real pickup within the next six months. Further interest rate hikes are forecast.
Manufacturers responding to the November Business Outlook Survey say economic conditions in the industrial sector have improved somewhat since last month. However, gains do not appear to be as widespread as they have been through most of the spring and summer. In terms of specific indicators, survey respondents report little change in the level of new orders in November, while shipments are up significantly. Consequently, inventories have declined in the past several weeks, and no improvement is noted on the employment front.
For the longer term, manufacturers foresee little improvement in business over the next six months. While no pickup in overall business activity is projected between now and May, new orders and shipments are expected to rise. At the same time, however, survey respondents plan to maintain inventories at their current levels. No change in either employment or the length of the average workweek is forecast. Manufacturers report plans to increase capital spending fractionally over the next two quarters.
Price hikes are again reported in the industrial sector in November. Almost 60 percent of the respondents this month report paying higher prices for raw materials while 25 percent say they have raised the prices of the goods they sell. Looking ahead six months, 90 percent of those surveyed expect to be paying more for inputs by May, and nearly 70 percent plan to charge more for their finished products.
Department store sales are sluggish in November, according to local merchants. Retailers report current dollar sales to be only 3 to 4 percent over year-ago levels. Nevertheless, this is slightly better than had been expected for this period. Retail executives had forecast a sharp drop-off in consumer spending by this time, but such a downturn has not materialized.
As for the future, merchants expectations about the Christmas buying season are a mixed bag. While some look for a good season, others point to the strong sales of last year and believe they will be difficult to match. Looking past Christmas to the first half of 1979, retailers generally expect slow sales to be the rule, with the distinct possibility of a "mini-recession."
Concerning the Administration's anti-inflation program, most merchants contacted feel the program will be largely ineffectual, particularly with regard to wage guidelines, but plan to try to cooperate with the program. They feel that price inflation will be somewhat slower next year so that the price guidelines will not be binding.
A Director of this Bank generally agrees with this view. He too feels that prices will not rise by more than the guidelines. His manufacturing firm will try to follow the wage guidelines, but he is not sure that this will be possible.
Local bankers say consumer loan volume remains strong, but that business loan demand is soft. C&I loan volume is reported to be between 3 and 6 percent over November 1977 levels and either "on target" or slightly ahead of plan. A possible cause of the softness could be high interest rates, according to one banker contacted. He claims business borrowers are turning to other sources of funds to avoid double-digit interest rates. Little improvement in loan demand is anticipated over the next six months.
The prime rate at all of the banks contacted is currently 10 3/4 percent and projected to go higher in the near future. Rising interest rates are forecast through the first quarter of 1979. Bankers believe that a peak in the first quarter could mean a prime rate as high as 12 to 12 1/2 percent.
High interest rates appear to continue to have a slight but definite effect on deposit flows at area banks. Net inflows are slow and time and savings deposits are well below anticipated levels at this time.