September 20, 1983
Reports from the Third District point to mixed economic conditions in September. The strength in activity remains centered in the manufacturing and retail sectors, where surprisingly robust growth has continued this month. Loan volume at area financial institutions, however, has weakened recently, and is mixed. Activity in the housing market continues to nose downward as mortgage rates rise.
Third District contacts foresee general improvement in business activity over the next six months. Both retail and manufacturing executives project healthy gains into 1984, although a slowdown in growth is anticipated. Local bankers are forecasting a sluggish upturn in lending activity and interest rates by next March. The outlook for housing is not bright, however, especially if mortgage rates continue to rise.
Real Estate and Construction
Third District housing activity has slowed again in the last six
weeks, but business is still well above last September's depressed
levels. Housing sales and new starts are reported to be off by
between 25 percent and 75 percent from their spring and early-summer
highs, and traffic of prospective buyers has also fallen
significantly. Builders and realtors contacted attribute the slide
to a combination of seasonal pressure and the continued escalation
of mortgage rates, which have risen about 50 basis points since
early August. Many real estate brokers indicate that a drop of
between 50 basis points and 200 basis points is needed to restore
strength to the market.
Manufacturing
Respondents to the September Business Outlook Survey indicate that
Third District industrial activity has picked up the pace of its
upward advance this month. September returns reveal the most
widespread improvement iii general business conditions this year.
Both new orders and shipments are up significantly over August
levels, and producers' backlogs have increased at many factories, as
well. Production activity has increased enough to prompt many
employers to add to payrolls and to lengthen the average workweek.
Despite the vigorous expansion currently underway in the manufacturing sector, survey respondents' outlooks have mellowed somewhat this month. Two-thirds of the participating businessmen expect further improvement in industrial activity over the next six months, fewer than at anytime in the last year. Climbing levels of new orders and shipments are still forecast, although not as strongly as in recent months, and further expansion of the factory workforce and working hours are planned. Capital expenditure plans are still fairly weak, but solid growth in inventories by the end of the first quarter is projected. Overall, survey respondents obviously expect the recovery to continue, but they seem to be indicating a slower rate of expansion over the next six months.
Prices in the manufacturing sector continue to drift upward, but survey results indicate that, on average, the pace remains slower than in the past. Roughly one-third of the participating businessmen report paying higher input prices since August, and another sixth have raised their final products' prices this month. Further increases in industrial prices are likely by March.
Retail
Sales activity at Philadelphia area department stores has remained
in excellent shape through August and into September. In fact, the
growth in the dollar volume of sales over year-earlier figures has
once again pushed into the double digit range, much higher than
merchants had anticipated. Very dry weather, rising consumer
optimism, and timely promotional offerings have combined to step up
the pace of retail spending. According to retailers, "back-to-
school" and other seasonal soft goods are moving especially well,
and most other lines are not far behind.
Area merchants predict that consumer spending will be healthy in early 1984 but that sales growth will settle down to more modest levels near year-end. Following a "reasonable" holiday season, gains of four percent to five percent over a year-earlier are expected for the first quarter of 1984. The cheery forecast has encouraged store operators to be less cautious about inventories, and stock levels, which are currently a little higher than a year ago, have notched some growth since August. Contacts indicate, however, that any further inventory growth will be carefu1ly controlled.
Financial
Local bankers say lean activity at major banks in the Third District
is mixed again this month. C&I loan activity has been "unexpectedly
quiet" since early August. Current reports on business loan volume
range from 11 percent below to 14 percent above a year ago, much the
same as they were six weeks ago. According to contacts, increased
corporate profits have sufficiently improved cash flow at many
companies, permitting more internal financing and preventing any
real firming of commercial loan demand. Loan activity on the retail
side continues to improve, but recent gains are not as strong as
earlier in the year. Although consumer lending is now as much as 11
percent ahead of last September, lenders say rising interest rates
have taken some of the edge off the demand for consumer loans.
Area banking officials foresee gradual improvement in overall lending activity over the next six months. C&I loan demand is expected to gain strength slowly through next March as commercial investment expands beyond the funds available internally. Most bankers also predict that consumer demand for credit will expand further despite the likelihood of slightly higher interest rates. Many lenders plan to maintain their aggressive marketing posture.
The prime rate charged by major Third District banks has risen to 11 percent in September from 10.5 percent in early August. Local seers are predicting that, because of positive reports on inflation and the money supply, upward movement in interest rates over the next six months will remain sluggish.. They are forecasting an increase in the prime and most other rates of between 50 basis points and 75 basis points by the end of the first quarter as both private and government borrowing expand.
Deposit flows have weakened somewhat in September, but bankers
attribute most of the decline to season factors. Demand deposits
have slipped slightly, and are now only one percent to two percent
ahead on a year-over-year basis. Growth in time and savings deposits
has slowed as well, but deposit levels have maintained their sizable
spreads over
pre-MMDA levels.