January 30, 1985
The Third District economy appears to be healthy at the start of 1985. Manufacturing is generally stable, the retail sector is on target after finishing 1984 above plan, and the financial sector reports substantial loan growth. Real estate continues to benefit from declining interest rates.
The outlook contains prospects for further expansion in almost all sectors. The majority of manufacturers see growth ahead although they are cautious. Retailers anticipate sales gains of over 10 percent, and plan to take measures to avoid a profit squeeze. Bankers project that continued confidence in the economy will propel loan demand. The only exception to the generally upbeat outlook may be in real estate, where the current tax law reform proposals are dampening the demand for investment properties. Purchases of owner- occupied properties are expected to continue to grow, however.
Manufacturing
Stability is the watchword of Third District manufacturers according
to the January Business Outlook Survey. While 27 percent of the
executives polled say business is up, over half of the survey
respondents report no change in industrial activity, and 17 percent
note a decline since December.
The performance of the specific indicators support the general reports of respondents. Thirty-nine percent of the respondents say inventories are down, the result of flat new orders and increased shipments. A majority of manufacturers report no change in producers' backlogs, employment, the length of the average workweek, or delivery times.
Looking ahead, manufacturers appear to be optimistic in their outlook, but reserved in their actual plans to prepare for further growth. Over 60 percent of the manufacturers polled foresee their businesses expanding further in the next six months. Widespread growth in new orders and shipments is projected, but respondents have no plans to add to either inventories or payrolls. They may lengthen working hours though should demand for their products increase.
Industrial prices have remained steady. Over two-thirds of the survey respondents say there has been no change in input costs from last month, and three-quarters have held their prices at December levels. As for the future, prices are expected to rise in the first half of 1985; almost three-quarters of the respondents forecast higher costs and about half plan to charge more for their finished products.
Retail
Retail sales are right on target so far this year, after what some
local retailers have called a "scary" holiday season. A rush of
activity in the last week before Christmas helped area merchants to
exceed their selling expectations for the season and end the year
with sales up 5 to 10 percent over December 1983; heavy promotion
was largely responsible for the surge in year-end figures.
Inventories are "clean" and at desired levels as retailers prepare
to take inventory and receive new spring merchandise.
Healthy growth is expected over the next six months with sellers anticipating sales advances of 10 to 15 percent over last year's levels. They expect to have to continue to rely on sales promotions to achieve these gains, however. As a result, some retailers are planning to undertake strong cost-cutting measures in order to avoid a profit margin squeeze.
Finance
Area commercial banks are registering pluses in both wholesale and
retail lending. Commercial loan activity is up with growth ranging
from satisfactory (4 percent) to exceptional (25 percent) on a year-
over-year basis. Economic expansion through mid-1985 is anticipated,
leading lenders to project further C&I loan expansion of about 10
percent over current levels. Substantial increases in retail lending
also have been experienced by Third District banks. Consumer loans
are reported to be up 20 percent or more over year-ago levels and
bankers expect continued strength in consumer confidence to lead to
gains of about 10 percent over present levels by July.
The prime rate was cut at area banks to 10.5 percent on January 16. Bank economists see the potential for another rate drop due to low inflation and the strength of the dollar, but they say the prime subsequently may be pushed up to 11 percent by the end of the second quarter of 1985 as the economy picks up steam. They expect the federal funds rate to increase to 8.5 or 9 percent by July.
Real Estate
Area realtors report continued strength in residential real estate
sales in mid-January. Townhouses, in particular, are doing well in
the City of Philadelphia, with sales over 10 percent better than
last year. The surge in home buying has been attributed almost
solely to declining mortgage interest rates. Thirty-year fixed-rate
mortgages are being offered for as low as 12-1/2 percent and
adjustable rate loans, negotiable after one year, for 10 percent,
depending on terms. Realtors note that purchases of residential
properties for investment purposes are just about dead. The tax law
reform proposal has encouraged a "sit and wait" attitude in
investors looking for tax shelters.