May 12, 1982
Reports from the Third District in May continue to point to a bottoming out of the slump, but hard signs of a pickup are scarce. Manufacturers say industrial activity is flat in May, compared to a month ago, and industrial prices reflect that softness. This is the third straight month in which manufacturing activity has remained unchanged. Retail business, on the other hand, is showing some signs of life after an illness that lasted through the winter and early spring. An announcement of total recovery for the retail sector, however, is still premature. Bankers say business is mixed.
As for the outlook, Third District contacts are reasonably optimistic. Manufacturers are predicting an upturn within six months, and retail merchants expect sales to continue at their current pace through summer. Bankers are forecasting falling interest rates through the third quarter, but weakness in commercial borrowing.
Manufacturing
Stagnation is the keyword for Third District manufacturers in May,
according to preliminary results from the most recent Business
Outlook Survey. Those results agree with earlier indications that
the downward slide in the local industrial sector has stopped. There
are no signs yet, however, of an upturn. Two-thirds of the
manufacturing executives polled this month say general business
activity is unchanged from April. Specific indicators such as new
orders and shipments are also flat, but producers' backlogs and
delivery times have slipped marginally. Liquidation of manufacturing
inventories also continues in May, especially in the durables
industries. And, while two-thirds of the survey respondents say
payrolls' are at the same level they were a month ago, a significant
number report further cuts in employment. Workings hours have been
shortened fractionally as well.
Looking ahead, Outlook Survey participants continue to forecast gains. Nearly 70 percent of the respondents say the general business climate will improve within six months; climbing new orders and shipments are projected by a similar portion. Concomitant with the expected expansion are plans to hire more workers and lengthen the workweek. Only marginal inventory building is in the picture, though, and capital spending plans are very weak for the second consecutive month.
Industrial prices in the Third District remain generally stable in May. Prices paid by manufacturers for raw materials are up only very marginally over last month, and prices received for finished goods are virtually flat. There are reports of price cuts in both categories. As for the future, survey participants think prices will pick up with the projected recovery. About half expect input costs to be higher six months from now, while a third are planning price hikes for the goods they sell.
Retail
Department store sales in the Philadelphia area are stronger in
early May than in recent weeks. Current dollar sales volumes are
reported to be running four to five percent ahead of year-ago
figures, compared to only a one-to-two-percent gain for the three
months ending April 30. While such a gain was expected, a good
portion of it comes from aggressive promotions and price reductions,
which has put continued pressure on profit margins. Area retailers
say the real strength in sales comes from nondurables, especially
popularly priced apparel, while hard goods continue to lag.
Sluggishness in durables is attributed to consumer uncertainty about
future employment and income, given the current economic
environment.
Local merchants remain cautious about the coming months. There is some feeling that both the July 1 tax cut and the July Social Security increase will be used by consumers to restore liquidity and will therefore be of little help to retailers. Sales are expected to continue at about their current pace at least through midsummer. A tight rein will still be held on inventories, however, and they'll be kept at their current trim levels.
Finance
Third District banking business is mixed this month, according to
current Redbook information. Consumer borrowing is still off
substantially, by design, while reports of commercial loan activity
put current business borrowing three-to-four percent ahead of the
corresponding period in 1981. Business in both categories has
improved from last month, when compared on a year-over-year basis.
The outlook for C&I loans, though, is not optimistic. Area bankers
are forecasting softening demand for business loans based on: 1)
lower inventory financing requirements in coming months; 2) low
levels of capacity utilization and capital spending and 3) an
expected drop in interest rates over the summer which may bring
long-term corporate debt offerings off the shelf. Just how much
further interest rates will have to drop to make the bond calendar
perk up is open to question. At least one contact thinks they are
within 100 basis points of that level.
Local bankers are currently quoting a prime rate of 16 percent, and see further cuts on the horizon. Most contacts anticipate a trough between 14 and 15.5 percent in the prime sometime in the third quarter. After that, they say, they expect a continuing hard line policy by the Fed to put upward pressure on rates again.
Deposit flows at Third District banks have pretty much worked through the usual April seasonal problems, and are now showing firmness which some bankers have termed "surprising." Demand deposits are slightly higher than they were a year ago, and savings are up sharply. Neither the new 91-day money market certificate nor the new 3 1/2 year certificate can be credited with that strength, however. Consumer response to both of those instruments has been very weak. Bankers feel that savers still prefer money market funds to the 91-day certificate, and that 3 1/2 years is too long-term for most depositors at this point.