April 15, 1980
Reports from the Third District in April indicate that business activity is currently tilted toward the sluggish side. Business conditions in the industrial sector deteriorated further after a short breather in March, and retailers, although still showing gains in current dollar sales, are experiencing declining real dollar volume. As for the future, manufacturers expect some relief over the next six months, but retail merchants say the worst is yet to come. In the financial sector, business borrowing continues and consumer loans are still up. However, there has been some recent softening as a result of the credit restraint program. The prime rate is currently 20 percent in the Third District.
Manufacturers responding to the April Business Outlook Survey indicate another significant drop in industrial activity after last months temporary halt in the ten month old downswing. New orders also slipped again, as did shipments-but by a lesser degree-so producers' backlogs continue to shrink. Inventory paring appears to have resumed as well. Factory payrolls are being held steady in April though, and only a marginal cut in the workweek is observed overall.
For the longer term, survey respondents are, for the most part, sticking with their six-month forecasts of the previous two surveys. General business conditions are expected to be about the same in October as they are now, with little change in new orders predicted. A fractional pickup in shipments is anticipated, however. To be on the safe side, manufacturers polled are planning further inventory liquidation, along with a minor cutback in employment and a shorter workweek. Expenditures on plant and equipment, on the other hand, are expected be somewhat higher in six months than they are now.
Industrial prices are up again this month, with three-fourths of the respondents paying more for inputs than they did last month, and half charging more for the goods they sell. No relief from inflation in the coming months is anticipated, as nearly 90 percent of responding manufacturers foresee higher costs for raw materials by October, and about 70 percent plan to raise prices on their finished products by that time.
Retail sales at local department stores are running about 5 percent ahead of April '79 figures at this time, a decrease in real terms. This may not be as bad as it appears, since Easter was late last year, providing a large sales base for comparison. Nevertheless, most merchants feel that the long-awaited slowdown has probably arrived, a feeling partially based on the recent softening of several old-standby merchandise lines, such as fashion apparel and accessories, which tend to weather recessions better than others. Accordingly, many merchants have adjusted their sales forecasts to include a recession in the second and third quarters, and expect to see nominal sales increases of only 1 to 2 percent over the next six months. Inventories at major retailing establishments are reported to be "in line," and there is no real fear that merchants will get caught with heavy stocks if there is a recession.
Most retailers contacted this month feel that the voluntary credit restraint program was more "cosmetic and political" than substantive, and that consumer credit was already slowing when the program was announced. Some feel that retailer-type credit has always been more restricted than bank card credit (e.g. requiring higher minimum monthly payments and a lower credit limit) and hinted that compliance with the program on the part of the retail community may be spotty.
Area bankers report mixed activity in April, a result of the recently instituted credit restraint program. Commercial loan levels at the banks contacted range from 4 to 19 percent above year-ago levels. Consumer loans are up slightly also, but are expected to dry up as they become increasingly costly for area banks to make. Looking ahead to the next six months, most contacts are forecasting some growth in C&I loan activity, but expect continued shutdowns in consumer and mortgage loans. All of the banks contacted plan to comply with the voluntary credit restraint program, and bankers for the most part, are optimistic about the program's success, "provided that the Federal Reserve Board remains strong in its commitment to the program."
Bankers in the Third District are currently quoting a prime rate of 20 percent. Projections of the prime indicate a peak over the next three months, followed by cuts that will leave the rate 150-300 basis points below its current level by October.