Beige Book Report: New York
May 12, 1976
The economy continues to recover smartly, according to Second District Directors and other business leaders who were contacted recently. Significant further growth in GNP is expected over the coming year; consumer spending for the most part remains buoyant; residential construction is beginning to recover in the District; and there continue to be expectations of a turnaround in capital goods outlays. Nevertheless, some apprehensions have been voiced about potential future shortages of steel and other metals. Against this background, prices are expected to begin rising more rapidly and forthcoming wage negotiations to result in substantial settlements.
All of the respondents expressing an opinion on the subject felt that a brisk economic recovery would be sustained over the balance of the year. Several noted that the economy had performed better during the first quarter than they had expected. Among others, the chairman of a multinational chemical corporation expected the upswing to continue to gather strength from greater than anticipated consumer demand. A Director associated with the automotive industry reported that, on the basis of recent domestic auto sales, he had raised his expectations for real GNP growth for 1976 from 6 to 7 percent. The president of a large metal producing firm reported that demand for metals was increasing somewhat faster than had been expected earlier.
The latest survey of the Buffalo Purchasing Management Association points to further significant improvement in the demand for locally produced goods, with virtually all respondents reporting a steady or increased flow of new orders, and nearly half reporting an improvement in the volume of new orders, as compared to only 13 percent so reporting a year ago.
As in previous months, consumer spending generally continued to be characterized as strong. The Buffalo Branch Directors reported that retail sales over the Easter shopping period had been "very strong," and good gains were also posted in suburban areas of the New York City region. Some slowing in early May in the rate of growth of department store sales in the Buffalo area as compared to last year was noted, but this was attributed in good part to the spurt in consumer outlays during the comparable period last year under the impact of the tax rebates. In any event, this softening was not apparent in the Rochester area. Moreover, a number of respondents reported the demand for automobiles in upstate New York continuing very strong, with some dealers having depleted inventories of certain models. The retail sales picture in New York City, however, was less favorable. April sales of large city department stores, notwithstanding the later Easter this year, registered a disappointing advance of only 3.3 percent from the year-earlier level—less than the rise in general merchandise prices.
While retail sales and the more recent rebuilding of business inventories continued to provide the main thrust to the recovery, there were further indications that the hitherto lagging capital investment and residential construction sectors might be picking up. A financial economist thus felt that even the 4 percent increase in real business plant and equipment spending in 1976 implied by the latest McGraw-Hill survey was too low. In his view, a rise of nearly 6 percent was probably more appropriate. Several other financial economists reiterated their expectations that capital outlays would pick up as the recovery proceeded. The residential construction picture continues to brighten in most parts of the District, with the notable exception of New York City. An official of a New York State thrift trade association reported that mortgage money was in substantially greater availability than last fall, and that even 90 percent mortgages were now being made in certain suburban areas surrounding New York City and Buffalo. The Buffalo Branch Directors reported that there was clear evidence of an upswing in housing construction in western New York. The improvement has been particularly apparent in prime suburban areas, but has also been evident in the low-to-moderate priced residential sector. Apartment construction remains in the doldrums, however, under the influence of high vacancy rates in some areas.
Regarding the price outlook, the official of the chemical concern mentioned above expected the rate of increase in wholesale prices to approach a 7-8 percent range by year-end, and expressed concern over the prospects of shortages in steel and certain other metals. The latter concern was also expressed by some other respondents. A Director noted the sharp increase in metals prices which he felt might reflect some speculation, but also the fact that in his view profit margins remain very low in most basic commodities. A Director associated with agriculture stated that he was not as optimistic as the Department of Agriculture regarding the 1976 grain harvest and that, in his opinion, higher grain prices are in the offing.
Another Director expressed the view that it appeared unlikely that the underlying rate of inflation could be kept down below 6 percent given the present state of consumer demand, fiscal policies, and of wage pressures. In the latter context, a number of Directors expected fairly strong wage demands from organized labor, with first-year settlements ranging from 8 to 10 percent in union contracts and with non-union wage increases lagging only slightly behind.