Beige Book Report: Philadelphia
March 23, 1983
Reports from the Third District in March indicate the local economy is expanding. Manufacturing activity has surged ahead substantially since January. Retail sales rebounded strongly from a disastrous February snowstorm and are quite strong in early March. Loan activity at area banks is unchanged but deposit levels are up. In the real estate market, home sales continue to increase and housing starts are slowly coming to life.
Third District businessmen predict further recovery for area business over the next six months. Manufacturing contacts are planning for substantially improved activity by September. Retailers say sales should stay strong through the summer. Bankers are forecasting minor gains for consumer lending, but stable demand for business loans.
Real Estate and Construction
The housing market in the Third District has entered the spring
buying season by gaining dramatically since January. Brokers report
sales volumes up 30 percent to 90 percent over year-ago figures.
Mortgage rates are now in the area of 12.50 percent to 13.50
percent. Realtors note, however, that it is still tough for first
time buyers to qualify for the lower rates, keeping an upper limit
on sales activity. While most of the activity is still in previously
owned houses, new homes are finally beginning to sell also. Prices
of new homes have firmed up a bit and, although the stock of unsold
units is still somewhat heavy, Third District builders are slowly
starting new construction.
Manufacturing
Manufacturers responding to the Business Outlook Survey say Third
District industrial activity climbed sharply both this month and in
February. A robust recovery for local industry finally seems to be
taking hold. New orders and shipments zoomed upward, halting the
deterioration of producer backlogs and slowing inventory
decumulation. Employee ranks held steady in March (the first month
since September 1981 without a drop), as did the length of the
average workweek.
Manufacturing activity is widely expected to pick up steam over the next six months, pushing the present expansion further along. Area businessmen predict that new orders will continue to soar between now and September causing a widespread buildup in producers' backlogs. In addition, survey respondents say that by early fall, stock levels should have turned the corner and begun growing. Plans for stepped-up production include enlarging payrolls, extending working hours and, reflecting renewed confidence, increasing capital expenditures in the next six months.
Industrial prices are mixed in March. Prices received for final products have held steady again this month but, after four months of stability, the cost of inputs has crept upward. A return to higher price inflation as business improves is projected, but not to the levels observed in the late 70s.
Retail
Sales growth at Third District department stores has dipped slightly
since the last Redbook, slowing from its fast start this year. The
east coast's "Blizzard of '83" virtually halted sales for several
days in early February, forcing many store closings and countless
transportation problems. The weather, however, has turned very
favorable since then, and sales in the last four weeks, aided by
larger than expected tax refunds, have recouped most of the early
February losses. Current dollar volume is ahead of last March by 10
to 12 percent, down from January's huge year-over-year gains but in
line with retailers' forecasts. Most lines are moving well, with
activity centered, as expected, in apparel and other soft goods.
Merchants are counting on a buildup in consumer confidence to keep sales moving through the summer. With the economy rebounding and shoppers' balance sheets in good order, and likely to improve with more tax refunds and a mid-summer tax cut on the way, retail contacts project year-over-year gains of about ten percent by September. Store operators, however, are planning to keep inventories in check at least until consistent sales growth is obvious. Stock levels are presently very trim.
Finance
Third District bankers report little change in loan activity in
March. Commercial loan volume, in line with lenders' plans, is about
where it was in January, ranging from even-with to nine percent
ahead of a year ago. Contacts report some recent cooling of C&I loan
demand, however, as rebuilding area businesses cut down on distress
borrowing. Retail loan activity remains above last March's levels as
well, but, in spite of declining interest rates, consumer caution
has kept the demand for loans below bankers' expectations. Banking
contacts are forecasting continued sluggishness in overall loan
demand for at least the next six months. Unlike retailers, they
project a slow recovery, and expect the demand for business loans to
be flat. In addition, consumer confidence will be slower in
developing than previously expected, they contend, providing only a
modest boost for consumer loans by September.
The prime rate at banks in the Third District is currently 10.5 percent, having dropped 50 basis points since the last Redbook. Interest rates have been firming recently with upward pressure coming mainly from worries about the federal deficit and Fed policies, according to banking contacts. Nevertheless, bankers are predicting the prime will slide another 50 basis points by the third quarter, but caution that some temporary upward movement is possible before then.
Deposit growth in the Third District has been substantial over the past six weeks. Demand deposits are currently running as high as seven percent above year-ago levels; bankers cite approaching corporate taxes and an increased precautionary demand for money as contributing to the surprising strength in demand balances. The money market account continues to attract large amounts of new money and keep time deposit levels high, as well. Current estimates put time deposits 16 percent to 40 percent ahead on a year-to-year basis.