Second District directors and other business leaders who were recently contacted generally welcomed the phasing out of wage and price controls. The respondents continued to see strength in business capital spending. Apart from automobiles and some other consumer durables, retail sales seem to be stronger than expected, but some retailers appear to be rather cautious in their sales expectations. The recent rise in business inventories does not appear to have resulted from weak sales-excepting large-size automobiles-but rather was attributed primarily to precautionary purchases by businesses against expectations of further price increases and shortages.

The respondents generally indicated that the time had come to eliminate wage and price controls. Some directors did expect the phasing out of controls to bring about a short-term spurt in inflation, but felt that such a move on balance would have a positive psychological effect on businessmen's decision-making, and that over the longer term market forces would correct supply-demand imbalances. The sentiment that controls were contributing to these imbalances was expressed by several other respondents. Among these, the chairman of a large multinational oil corporation noted that while controls had been in effect for over two and one half years, they had failed to bring inflation under control, but had created uncertainties and contributed to shortages of various products. He felt that their removal would improve the business climate and probably help avoid a serious contraction in business activity.

The respondents in general expected the sizable planned increase for 1974 in business plant and equipment outlays to be largely implemented. A New York City banker thus noted that many industries will continue to operate close to capacity even during a mild recession, and will require additional capacity to meet demand in the next period of expansion. The view that capacity shortages would stimulate capital investments was also expressed by the chairman of a large oil corporation, who noted, that petroleum industry capital spending was expected to rise sharply to help meet the country's energy need. An upstate banker similarly looked for increased demand for energy-related capital equipment, while another upstate banker felt that the current shift toward smaller cars in the automobile industry would require major plant and equipment expenditures. The president of a large nationwide retail chain felt that recent economic developments should have no significant impact on business spending plans. He noted that in the retail industry (and presumably many other industries) capital spending decisions are made far in advance of actual outlays, leaving little flexibility to respond to changes in the short-term economic outlook. Some respondents, however, while in general expecting continued strength in capital outlays, did express some reservations regarding businessmen's ability to implement fully their plans because of materials shortages.

Concerning consumer spending, the president of the retail chain mentioned above reported that his firm's sales in February had slightly exceeded expectations, in both store and catalog operations, but that the firm was maintaining a cautious attitude over the sales outlook because of the potential problems facing the economy over the next several months. A New York City banker, while characterizing retail sales as "fairly good", pointed to the decline in auto sales and to signs of slippage in appliance and lower-priced furniture sales. One observer noted, however, that appliance sales have been exceeding some manufacturers' expectations. The chairman of a drug manufacturing firm, moreover, felt the retail sales picture remained strong, while another respondent reported that his contacts at a large New York City department store characterized business as "booming".

A number of respondents reported some changes in consumers buying habits. The Buffalo branch directors felt that on the one hand inflation was promoting anticipatory buying, but that at the same time, consumers were constrained by the fact that prices were rising faster than incomes. One director pointed to increased emphasis on utilitarian purchases and decreased emphasis on "frill" items. On the other hand, the chairman of a major nationwide food processing firm reported a surprising upgrading of quality in consumers' purchases. A retailer reported that owing to the gasoline shortage, consumers seem to be concentrating their grocery, clothes, dry cleaning, and most other shopping at one time-mainly on Saturdays.

In the view of most respondents, large-size automobiles were about the only sector where weak sales seem to have accounted for the recent build-up in inventories. Most felt that inflation and fear of scarcities were important factors in the recent increase. An upstate banker reported that inventory financing at his bank was at an all time high, and saw evidence that some businesses were buying whatever they could now, in anticipation of more serious future shortages. A New York banker also mentioned evidence of growing speculative inventory building because of fears of further price increases or of continued shortages. He and several other respondents, however, reported that businessmen in general felt their inventory positions to be in reasonable balance with sales, except for shortages of a number of materials. In this context, it was noted that in some instances, shortages of certain items prevented some firms from converting a substantial part of their present inventories into marketable products.