March 13, 1984
The Third District economy has shown unexpected strength over the last six weeks. Local manufacturing posted gains in February, and retailers continue to experience surprisingly high levels of sales. In the financial sector, C&I loan activity is finally showing steady growth after months of disappointing performance. And, in the real estate industry, steady mortgage interest rates and some pent-up demand for homes have spurred sales since mid-January.
The outlook for the next six months is marked by general optimism but with a touch of caution. Manufacturers expect increasing activity into the summer and retailers foresee continued strong sales. Both bankers and realtors, however, have expressed concern as mixed interest rate forecasts lead to varied outlooks for the two industries.
Manufacturing
The Third District manufacturing sector posted further increases in
activity in February, according to the most recent Business Outlook
Survey. While February's gains were not as robust as the previous
month's, over 37 percent of those surveyed reported an improvement
in activity over very healthy January levels, roughly 40 percent of
manufacturers surveyed reported that new orders and shipments have
continued to rise, while producers' backlogs and delivery times were
unchanged. Inventories increased marginally, their first monthly
gain since May 1981. As for employment, both payrolls and the length
of the average workweek held steady at their January levels.
Despite less prevalent gains in manufacturing activity during February, the outlook for the next two quarters is even more optimistic than January's. Eighty percent of these surveyed expect their businesses to expand further by July, and the percentage at respondents planning to increase capital expenditures remains encouragingly high. Additionally, over 70 percent foresee continuing gains in both new orders and shipments into mid-summer. The employment picture also looks bright, with roughly half of the survey respondents expecting larger payrolls, and one-third forecasting a longer workweek by July.
Industrial prices continued their pattern of steady increases in February. Thirty percent of the executives polled said they were paying more for materials than in January, while only 16 percent reported receiving higher prices for finished products. The six- month outlook was virtually unchanged from January's; 84 percent predicted higher producer costs by July, and 61 percent anticipated receiving higher prices for their own products.
Retail
Third District retailers are enjoying continued success as early
March sales are up an unexpected 20 percent over a year ago.
Merchants credit the performance to unusually mild weather, the
continued strength of the consumer sector, and low sales at this
time last year. Despite such surprising robustness, retail
executives report no shortages of merchandise. Leading sellers
include men's and women's sportswear and "soft" home furnishings.
Several store managers note that credit sales have increased
recently relative to cash sales, reflecting what they feel is
perceived economic security on the part of the consumer and the
anticipation of tax refunds. No area retailers expect to levy a
surcharge on credit purchases if Congress votes to remove the ban on
such fees. They feel that credit surcharges would penalize the
majority of their customers and have a devastating effect on sales.
Retailers say that current in-store promotions are typical for this time of year, but add that the general level of such promotions is on the rise as the industry becomes more competitive in the Philadelphia area. Many report that they are conducting extensive media advertising and will continue to do so in the future.
Looking ahead, merchants are uncertain over late March sales due to the late Easter season, but generally forecast sales to be 10 percent to 15 percent higher than a year earlier over the next six months. Accordingly, inventory plans, even those of traditionally conservative retailers, are very expansive for the same period.
Financial
Third District bankers report moderate but steady increases in
overall loan activity since mid-January. Many contacts are pleased
that, despite the prevailing strength in corporate liquidity, C&I
loan activity has made steady gains since early January. Current
levels of business loans outstanding generally range from 10 percent
to 20 percent ahead of February 1983, although one smaller bank
reports an 8 percent decline from last year. Reports on consumer
lending are mixed; the majority of those contacted are experiencing
a seasonal slowdown in retail loan growth, while others, who have
been marketing consumer loans very aggressively and expanding their
credit card operations, have experienced growth rates of up to 4
percent over the past six weeks. Current reports of consumer loans
outstanding range from 12 percent to 40 percent over year-ago
levels.
Encouraged by the recent steady improvement in the C&I sector, bankers predict moderate, but consistent commercial loan growth throughout the year, with forecasts ranging from 10 percent to 15 percent above same-period 1983 levels. Financial executives base their optimistic outlook on the continued strength of the economy, rising capacity utilization rates, and an erosion of corporate liquidity. The retail outlook is mixed, however, with buoyant consumer confidence offset to some extent by the spectre of higher interest rates.
Area banks are currently quoting a prime rate of 11 percent, unchanged since August 1983, but contacts anticipate some upward movement in rates for 1984. Most predict, however, that rates will do very little over the next six months as economic growth eases and Fed policy remains steady. It is during the last quarter of 1984 that local bank economists foresee increased borrowing demands, rising inflation, and tight Fed policy driving rates up by 25 to 100 basis points.
Real Estate/Construction
Real estate and housing activity in the Third District has been
flourishing since mid-January. February housing sales are up between
15 percent and 20 percent from a fair February 1983, although one
major builder in New Jersey says his sales have tripled. Stable
mortgage interest rates are cited as the primary reason for the
recent surge in sales. Also mentioned as strong contributing factors
are very mild mid-winter weather and significant pent-up demand from
last fall when more widespread interest rate uncertainty kept many
prospective buyers out of the market.
Homes in the $75,000 to $125,000 price range in the City of Philadelphia and in the $70,000-$85,000 range in suburban areas are exhibiting the strongest sales. Buyer traffic seems to be split along geographical lines; suburban contacts report that traffic has nearly doubled since early January, while Philadelphia realtors have seen the same number of, or fewer, customers. Inventories of unsold homes have remained at fairly constant levels despite the heavy sales, but contacts note that units are staying on the market for a much shorter duration.