April 11, 1979
Indications from the Third District are that economic activity is mixed in April. The industrial sector reports only marginal expansion this month and retail executives say sales have become extremely soft in the first weeks of the month. There is even some feeling in the retail sector that this may be the beginning of the downturn many people have been forecasting. As for the future, manufacturers look for a slowdown within six months, while merchants remain very cautious and conservative. One bright spot in the Third District picture is the banking industry. Area bankers report strong business loan demand, and expect the trend to continue at least through October. However, some drop-off in consumer loan volume is anticipated.
Third District manufacturers responding to the April Business Outlook Survey indicate only marginal expansion in overall industrial activity this month. In terms of specific indicators, new orders are up only fractionally while shipments continue to increase. Consequently, manufacturers' inventories have fallen for the sixth consecutive month. Factory employment, though, continues to grow. Survey respondents report both larger payrolls and slightly longer working hours in April.
For the longer term, executives in the industrial sector retain their pessimism. Nearly half of those polled in April expect business conditions to worsen by October, while less than one-fifth anticipate further growth. And, for the first time in this expansion, survey respondents are forecasting a drop in virtually all specific indicators. Both new orders and shipments are projected to fall significantly within the next six months, and a further paring of stocks is planned. At the same time, manufacturers foresee a slight cut in the size of factory work forces, along with a shortening of the workweek.
On the price front, inflation continues in the District's industrial sector, and manufacturers expect to see more of the same over the next two quarters. Four out of five of the executives surveyed in April report paying higher prices for inputs this month, and two out of five are charging more for their finished products. Looking ahead to October, about 80 percent expect further hikes in the cost of raw materials, and 65 percent plan to boost the prices of the goods they sell.
Area retail sales have been "uncomfortably soft" thus far in April, following two boom months. Merchants were expecting large year-over- year increases in early April owing to the change in the calendar position of Easter. Such increases have not materialized, however, leading many retailers to believe that sales have softened dramatically lately. In fact, instead of attributing the slow sales to the usual transitory causes, one merchant believes that "March was quite likely to be the last good month retailers will see for some time."
Looking ahead to the summer and early fall, retailers are extremely cautious. The general feeling is that large boosts in the price of essentials such as food and energy will leave less money for consumers to spend on other things. Furthermore, Third District merchants had a strong summer in 1978, which will make big year- over-year gains difficult. Overall then, sales executives are looking for a marginal increase in nominal sales volume with about a 5 percent drop in real volume. Retail inventories, reported to be about as desired now, should not undergo any major change within the next six months.
Area bankers report continued strength in both business and consumer loan demand in April. Business borrowing is up as much as 10 percent over year-ago levels and generally as planned. Bankers foresee little change in the business loan situation through October, but anticipate a slight drop-off in consumer loan volume.
The prime rate remains at 11 3/4 percent at all banks contacted this month. Forecasts of the prime rate for the next two quarters continue to be widely varied, ranging from a move to 12 percent in the near future followed by a leveling off, to a continued climb through summer with a 14 percent cyclical peak in August or September.
Deposit flows at local banks appear to be adequate at the present time. Commercial banks report no ill effects stemming from changes in Regulation Q on the fifteenth of March. Money market certificates are still selling in the area, with about 50 percent of the money they attract coming from other accounts within the issuing institution.