February 11, 1976
Second District directors, businessmen, and business and financial economists who were recently contacted generally indicated that they were encouraged on the outlook for continued economic recovery. In their view, business inventories are now in reasonably good balance with sales expectations. With inventories thus realigned, most respondents felt that businessmen would pursue cautious inventory policies in the coming months, with stocks growing in line with sales. A minority of respondents, on the other hand, felt that any strengthening of demand should stimulate efforts to stockpile metals and would quickly drive up prices. For the most part, however, inflation was seen as moderating somewhat further, except in a few trouble spots. Some concern was also voiced over the large wage and benefit settlements that are likely to be demanded in forthcoming collective bargaining negotiations. Liquidity problems, however, were generally not viewed as posing any significant threat to the recovery this year.
The inventory situation was generally described as in good balance with sales. Indeed, according to one director, manufacturers were being, if anything, overly cautious in their inventory building. The Buffalo directors expected firms to maintain tight inventory control, although they saw prospects of "cautious and watchful" inventory buildup. The chief economist of a major chemical company, whose firm had only recently escaped from a tremendous inventory overhang, confirmed that his company was holding a "tight rein" on inventories. The president of a major metal company observed that inventories in his industry had finally been brought into reasonable alignment with current sales. He felt that any strengthening in demand would prompt purchasing agents to aggressively seek to accumulate inventories. Among other sectors, one financial economist looked for increased liquidation of agricultural stocks held over from 1975, and also wondered whether severe cold weather would sharply reduce stocks of residual fuels.
On the outlook for price increases, a majority of respondents expected inflation to diminish in coming months, led by slower growth in food prices. At the same time, however, price pressures were seen developing in a number of sectors. The chairman of a major New York City bank expected overall prices to rise in a range of 5 to 7 percent for the balance of the year. Buffalo directors agreed with this assessment, expecting prices to increase 6 percent—somewhat below the recent rate of increase. A slowing in agricultural prices was viewed as one of the primary factors contributing to a slowdown in the rate of inflation. A director with agricultural interests expected food prices to decline and noted that there was already some evidence that this was occurring. An investment banking economist looked for a slowdown in fuel price increases in coming months as the result of the lifting of the crude oil tariff. Less encouragingly, he foresaw near-term pressures on metals prices developing. The president of a major metals company also expected rapid industrial wholesale price increases as a result of tight operating margins in most industrial concerns. Short-term upward pressures on paper and lumber prices were seen as a remnant of the Canadian mill workers' strike.
On a related subject, a senior economist at a major manufacturer that is facing heavy collective bargaining this year felt there was little chance of any abatement in the rapid first-year-of-contract wage gains that marked last year. In his view, moreover, nonunion wage gains would accelerate in order to "catch up" from earlier imbalances. He expected hourly compensation to increase at least 9 percent during 1976, reflecting not only rapid wage and benefit increases but also cyclical increases in hours of overtime work and changes in the mix of employment among industries. Another business economist, on the other hand, expressed the view that continued high rates of unemployment would help to restrain wage increases in the nonunionized sector, even if some major unions won exceptionally generous settlements.
Questioned on the possibility that liquidity problems might retard
economic recovery this year, the directors felt these uncertainties
had largely faded into the past—either having been resolved or
close to being resolved. In their view the supply of funds was more
than ample to support the continuation of a moderate recovery. The
chairman of a major New York City bank did note, however, that bank
lending policies were "more conservative and quality-oriented" but
could not determine if this would become a significant drag on the
economy. Another director observed that financial institutions had
apparently become more aggressive in the mortgage market. While not
foreseeing any near-term balance sheet imbalances, several
economists of nonfinancial corporations were concerned over the
longer-term capital problems stemming from the insufficiency of
internally-generated funds to meet prospective needs for capital
investment.