According to Second District directors and other business leaders who were recently contacted, there has as yet been little easing of materials shortages and capacity limitations. The business capital spending outlook on balance remains strong, but the District residential construction picture appears bleak. High financing costs, as well as shortages, may be inhibiting inventory investment in some sectors, and little evidence of excessive inventory accumulation was noted.

Most respondents perceived little or no indications that shortages and capacity limitations were easing up. Among others, the president of a multinational chemical corporation reported continuous shortages and capacity limitations in his industry, while a senior official of a nationwide chain of department stores noted that many items were still not available. An official of a large paper firm reported that while his firm might be obtaining an adequate supply of raw materials, the production capacity situation in the paper industry was still very tight and his firm was behind in shipping its products to its customers. The president of a large electrical equipment distributing firm, on the basis of conversations with his firm's suppliers, saw no easing as yet in the supply and capacity picture. On the other hand, the chairman of a large New York City bank reported that some basic materials have become more easily available since price controls were removed, and the president of a nonferrous metals product manufacturing concern reported some softening in the copper and brass markets, which he associated with the current weakness in the auto and construction industries. Both respondents, however, noted that many materials shortages still persist.

Responses to a question about business capital spending were mixed, but most of the respondents felt that financial market conditions had not yet caused firms to cancel or cut back their capital spending plans, at least in dollar amounts. The New York City banker mentioned above thus stated that he was not aware of any reduced capital spending plans, while the retailer reported that his firm was upgrading its capital spending plans to take into consideration the rise in construction costs. The official of the paper firm reported that his firm, and probably the paper industry in general, was embarking on a three- to five-year expansion program involving significantly higher outlays than had been expected in recent years, while the president of a diversified financial institution characterized the demand for capital as "still good." On the other hand, the president of a large New York City bank stated that some of his bank's business customers reported that their firms were cutting their expansion programs in physical terms although not in dollar terms, and the chairman of another large New York-based financial institution noted "some cooling of enthusiasm" regarding expansion programs. The president of the nonferrous metal products concern stated that his firms had become "definitely more conservative" with respect to capital expenditures in the light of current financial market conditions; and while another director was not aware of reduced capital spending plans solely as a result of financial market conditions, he felt this could become a factor for some electric utilities.

There were suggestions that current high, short-term interest rates may be, as stated by a New York City banker, acting as a "restraining influence" on firms' inventory policies. The president of the nonferrous metal products firm reported that the high cost of carrying inventories had induced his firm to institute tighter inventory controls. The great majority of the respondents commenting on the inventory situation felt that there has been no excessive inventory accumulation as yet. Among others, the president of an electric equipment distributing firm reported that his firm's sales had risen more rapidly than its inventories, and he felt this was also true for many of its customers. Other respondents, including the retailer and the paper company official, cited the shortage of some items as another factor inhibiting inventory accumulation.

Second District residential construction remains weak. The president of a large New York City savings bank cited the continued loss of deposits by thrift institutions to higher-yielding Treasury securities and, in his view even more significant, the high cost of construction with new housing not selling well. An official of a savings bank trade association reported that savings banks in the New York City area had continued to suffer net outflows of deposits in May and that the savings and loan associations had probably undergone a similar experience. He saw no evidence of a turnaround in residential construction at this moment. The respondents in general felt that the Administration's new housing program was likely to have little effect on the housing industry. In the view of the savings bank association official, it might be a "cushion" to a further decline in residential construction rather than a stimulus.