January 31, 1979
Reports from the Third District indicate that economic conditions are mixed this month. Although executives in the industrial sector say there has been no expansion in manufacturing in January, retailers report boom conditions. For the longer term, manufacturers generally look for a slowdown to come by late summer, while retailers in the area have mixed views about near-future business conditions. Local bankers report sluggish business loan demand presently but see it as a temporary condition and look for a pickup within a few months. Interest rates are projected to peak after midyear, but forecasts of what that peak will be vary widely.
The pace of industrial activity in the Third District is unchanged from last month according to manufacturers responding to the January Business Outlook Survey. Although shipments are up at area factories, new orders are no higher than they were in December. Consequently, inventory levels have tumbled for the third consecutive month, and employment levels are reported to be unchanged from December.
Looking ahead to the next six months, responding manufacturers' confidence about the strength of the economy continues to diminish. Nearly three-quarters of the Survey participants are anticipating either a further slowdown in business activity or, at best, a continuation of present conditions. A drop-off in new orders is projected along with declining shipments. Further trimming of inventories is also planned. As a result of these projections, a marginal cut in factory payrolls and further shortening of the average workweek also appear to be likely.
On the inflation front, prices continue to rise in the region's industrial sector. Almost three-quarters of the manufacturers polled report paying higher prices for raw materials this month, while one- third are charging more for their finished goods. For the longer term, about 9 out of 10 of the executives look for further increases in the cost of inputs and 3 out of 4 plan to raise the prices of the goods they sell.
Retailers in the area say sluggish sales experienced in mid-December picked up steam a few days before Christmas and have been rolling along quite well since that time. Current dollar sales at area department stores are running as much as 15 to 20 percent ahead of year-ago sales and well ahead of plan. Local merchants say that even after accounting for inflation and the fact that last January's business was depressed by record bad weather, sales are still 5 to 10 percent ahead of year-ago levels.
As for the future, retailers have varied outlooks. While some look for continued strength, others feel that increased social security taxes, the possibility of local property tax hikes, and fear of rising inflation could cause consumers to hold on to dollars they might otherwise spend.
The late Christmas sales rush saved most merchants from getting caught with heavy stocks in January. Inventories are reported to be in good shape now, but retail executives have adopted an extremely cautious position with regard to stock levels over the next few months.
>Area bankers say business loan demand is very slow at this time and that consumer loan volume, while still rising, is starting to taper off. According to bankers contacted, some of the reasons for sluggish business borrowing are relatively strong corporate profits recently and a run-off in inventories, both of which reduce the need for businesses to borrow. Some of the slowdown could also be seasonal. Looking ahead to the next six months, bankers are moderately optimistic in general. Projected strong capital spending and both voluntary and involuntary inventory building will provide a source of loan demand over the next several months.
All of the bankers contacted project rising interest rates throughout the first half of 1979 and into the third quarter. Six- month forecasts of the prime rate (currently 11 3/4 percent) range from 12 1/2 percent to 14 percent, with a cyclical peak generally anticipated around August.
Money market certificates are still very much in demand in the Third District, but they are not attracting as much "new money" to banks as they had been. Bankers note that a rapidly rising percentage of the certificates is being bought with proceeds from maturing CDs issued by the same bank or with withdrawals from savings accounts.