March 14, 1979
Reports from the Third District indicate that economic activity is expanding overall. The manufacturing sector has resumed growth after a four month lull and has given factory employment a boost in the process. The pickup is not expected to last, however, as executives in the industrial sector look for a downturn within the next six months. In the retail sector, sales are mixed as the best performers only break even in real terms. Spokesmen in this industry also look for sluggish conditions through the summer. Local bankers report strong loan volume in March and foresee little change in the near future. Interest rate forecasts are varied.
Expansion has resumed in the Third District's manufacturing sector in March, ending a four-month old slowdown. Executives responding to this month's Business Outlook Survey say both new orders and shipments are up from their February levels, while inventories have dropped for the fifth consecutive month. At the same time, the pickup has given a boost to the area's industrial employment. Survey respondents report larger factory payrolls in March, as well as a longer workweek.
Despite this sudden burst of activity, manufacturers still see bleak prospects for the next six months. Of the executives polled, nearly one-half look for a deterioration of business conditions between now and September, while another one-fourth foresee no change from the current situation. In terms of specific indicators, new orders are projected to fall fractionally while a slight pickup in shipments is anticipated. Minimal inventory building is forecast, along with a mild increase in plant and equipment expenditures. As for the employment outlook, responding manufacturers expect to increase the size of their work forces, but at the same time, trim the length of the workweek.
Inflation continues in the industrial sector in March, with 3 out of 5 survey participants reporting higher prices for inputs this month and 2 out of 5 getting more for their finished products. As for the future, over 80 percent of the manufacturers anticipate higher raw materials costs by the end of summer, and 70 percent expect to be charging more for the goods they sell.
Retail sales in the area are mixed this month. Reports of current dollar sales range from zero to 6 percent over year-ago levels. This means that in real terms even the best performers have only matched March '78 sales. Executives contacted cite several possible causes of the general sluggishness including an unexpected increase in consumer outlays for energy stemming from unusually bad weather this year, and recent hikes in state income taxes and local property taxes in the District. A Director of this Bank in the retailing business adds that sales were hurt badly when heavy snow forced store closings last month on Washington's Birthday, traditionally a high volume day for retailers.
Looking ahead to the next six months, most merchants are taking an "ultra-conservative" stance. Strong early summer sales last year will make big gains in 1979 difficult. Moreover, the distinct possibility of a public transit strike in the Philadelphia area this month could keep the lid on sales in an absolute sense. Consequently, retailers are generally looking for summer sales to top '78 volume by, at most, 2 percent. Inventories have already been brought into line with these expectations, and contacts foresee no further adjustment.
Local bankers say the demand for both business and consumer loans is strong this month. Current C&I loan volume is reported to be as much as 12 percent over March '78 volume and generally on target or a little over budget. Bankers see little change in this situation through September, barring any adverse international developments.
The prime rate at all of the banks contacted this month is 11 3/4 percent. Forecasts for the next two quarters vary from a move to 12 percent shortly, followed by a six month plateau, to a climb through the summer with a cyclical peak of 14 percent in August.
Deposit flows at area banks appear to be "adequate" currently. Commercial banks are still selling money market certificates, but the proportion of new money attracted by them is estimated to be as low as 50 percent at some institutions.