May 16, 1979
Third District economic activity is expanding overall this month. Manufacturing appears to be holding its own, and retail sales have generally picked up from the April lull. Bank loan demand remains very strong. The six-month outlook is mixed, however. Executives in the industrial sector continue to forecast an imminent downturn, and are joined by some merchants. There is some sentiment in the retail sector though that if a recession is coming, it won't start until the fourth quarter. Bankers forecast continuing strength in loan demand between now and November.
Respondents to this month's Business Outlook Survey report no change in manufacturing activity relative to April levels. New orders remain stable while shipments have been stepped up. Consequently, inventories have shrunk, continuing a seven month trend. Industrial employment growth has apparently slowed also, as manufacturers report little change in either the size of their payrolls or the length of the workweek.
As for the future, survey respondents continue to forecast a downturn in industrial activity within six months, with the bears outnumbering the bulls by nearly two to one. New orders are expected to remain unchanged between now and November, and a further increase in shipments is expected. No change in inventories is forecast, leaving stock levels about where they were at the beginning of 1979. Despite the bleak outlook, however, Third District manufacturers plan to add to their work forces over the summer and fall, as well as boost spending on plant and equipment.
Inflation continues in the Third District industrial sector. In the current survey, about five out of eight of the executives polled report paying higher prices for inputs in May, while three out of eight are charging more for their finished products. More of the same is anticipated through the balance of the year. Five out of six respondents foresee higher raw material costs by November, and two out of three plan to raise the prices of the goods they sell.
Area retail activity has picked up in May. Reports of current dollar sales range from five to twenty percent over May '78 volume. Sales are generally reported to be as planned. There are some signs of unanticipated inventory accumulation, but this is not the rule.
Looking ahead to the next two quarters, retail merchants have diverse expectations. Sales forecasts for November range from just slightly under year-earlier levels to ten percent above those levels. Merchants at the lower end of the scale foresee a stagflation scenario starting at the end of the current quarter. Others expect consumers to continue buying to beat expected price hikes, with no sign of a slowdown evident until October or November at the earliest. Retailers do not expect any major inventory problems over the next six months.
Both business and consumer loan demand continues strong according to area bankers contacted in May. C&I loans are up as much as sixteen percent over May 1978 levels and consumer loans, although not showing quite as large a year-over-year increase, are higher than many bankers had anticipated. Bankers foresee little change in the business loan demand situation through November, but are allowing for the possibility of slower consumer borrowing as the public faces higher food and energy bills in the coming months.
The prime rate is holding at 11 3/4 percent in the Third District but a move to twelve percent seems imminent. Bankers' interest rate forecasts vary beyond the next few weeks. Some see a flattening after a move to twelve percent, but others anticipate successive increases with a late summer peak 75 to 100 basis points above current levels. Deposit flows at local banks still look to be adequate. There have been moves to downgrade the importance of CDs and rely on nondeposit sources of funds to some extent, but this practice does not appear to be widespread. Money market certificates are still in heavy demand.
One area bank recently introduced a new innovation aimed at attracting new deposit funds and concurrently serving as a hedge against future interest rate hikes. The institution was issuing $1000 repurchase agreements with a one-year maturity and carrying an effective interest rate of nine percent. According to a spokesman for the bank, response to the instrument was strong and a remarkably high percentage of the funds attracted was "new money." Nevertheless, sales of the "repos" are scheduled to end on May eighteenth. A recent news release by the bank indicates that the principal reason for withdrawing the instrument is that its success and emulation by other financial institutions might hinder progress in the gradual elimination of Regulation Q.